Metair Investments Limited (MTA) Earnings Call Transcript & Summary

Excellent. So thank you, everybody joining the Interim Results Presentation Metair. So welcome, everybody in the room and everybody online. It's an interesting presentation. But obviously, the outlook is quite good for the company regardless of what's happened in the last 6 months, which we're very proud of. So I think as incoming CEO, I thought let me just kind of give a state of the, let's call it, not state of the nation, but the state of Metair address to shareholders rather than just kind of top-of-mind issues and what we're dealing with, et cetera. So I think in the short term, just to confirm our vision, I suppose, is we want to become and we are a leading automotive component and energy storage solution partner to all of our customers in the market, right? So that is fundamental to our success. Secondly, we have -- and I'll cover that in some of the slides to come, we've got significant change in the automotive industry. It's going to hit us in the next 2 years, 3 years, leading up to 2030, et cetera. But I'm very excited to lead a very capable team. At this point in time, we're strengthening the team. I'll talk to that as well. At this point and I think it's going to give us great opportunity into the future as well. So my focus areas at the moment, short term and long term, probably shorter-term operational efficiency, and we'll talk to Hesto specifically separately is to ensure that we've got the stability, efficiency, competitiveness, which is always front and foremost of all of our discussions with customers, but also the management bandwidth capacity, capability, et cetera, to deliver on what's required over the next few years. Secondly, automotive components. In South Africa, I mean, there's been a lot of announcements recently about new entrants into the market, et cetera. It's all very positive, especially Stellantis announcing their potential ZAR 38 billion investment into South Africa [indiscernible]. 50,000 vehicles potentially going to 90,000 [indiscernible] commercial vehicle. Obviously, we are very well placed to participate in that. And it's going to hit off the press. So it's not incorporated in our presentation, but certainly [indiscernible]. Okay. So that's very good. So I think front and foremost is preparing our group companies for the future. We do anticipate significant change in technology, which I'll cover in the next couple of slides as well as combined with these technology changes is obviously project management, project delivery, preparation for projects, et cetera, and the complexities that go along with that. Some of those we'll discuss specifically from a Hesto perspective, but obviously, it's across the group. Energy storage, we'll cover in detail, but there are significant opportunities. And from an export point of view, we have lost -- I suppose I'm leading with that message. We have lost Russia because of sanctions and the U.S. market because of, let's call it, geopolitical issues. So the main focus will be to recover export volumes in that region, rightsizing the business, et cetera. Longer term, maybe short term is looking at the portfolio of companies that we have within Metair. So we've got 15 investee companies. And it's to ensure that we enhance some of their performances. There may be some rationalizing of portfolio companies, but obviously, in our minds is derisk of the portfolio. And when we do risk from a Metair perspective, we don't like to deal with things that we can't manage or we can't control. So obviously, something like Turkey, something like Romania, Russia, Ukraine, et cetera. Those are things that we don't like, we can't control. So obviously, from a portfolio assessment, we are actively looking at that as we've communicated previously to the market. And then lastly, which is probably the most important thing, ultimately, is financial performance. Regardless of the last 6 months and some of the issues that we've had, the major focus is on financial profitability, cash generation, sustainability of all of our companies in line with our customer requirements. And obviously, we've had significant investment aligned with Ford and the Ford business, and we need to deliver on the expectations that we have on ourselves and obviously, from shareholders and funders as a result. And we're very confident that we can still deliver on that, regardless of some of the issues that we'll discuss on the 6 months. So just in terms of business stability, operational performance and competitiveness, we've actively looked to broaden the leadership within Metair from an operational perspective, from a manufacturing perspective, from an insight, et cetera, perspective. So we have brought Wolf in. Wolf at the top there. He's Metair automotive operations executive. And now he is full-time assigned to Hesto to bring Hesto to the level that it needs to be in terms of efficiency, profitability, cash generation, et cetera. Secondly, don't ask him any questions because Johan is brand new. He's a Chief Operating Officer appointment. It's on a bringing in exactly. Johan has been in the automotive industry for 40-plus years with BMW. So it gives us a significant OEM perspective on the business, but certainly gives us a lot of insight into kind of the other side of the table as component manufacturer as well. We're obviously always facing off with the OEMs. So we're excited to have Johan. Main purpose will be obviously to bed down the step change, new customer project, which is Ford and mainly Hesto. And we've had a lot of comments from shareholders around Hesto for the first 6 months. We'll go through it in the outlook. But certainly, the outlook looks much more promising than what we've had over the first 6 months, because we need to reach our targeted efficiencies, quality and output. On an output perspective, I can say that we're meeting all of our customer requirements 100%. So we're not letting the customer down at all. But obviously, we need to serve them at a level which gives us profitability and cash generation, et cetera. As such, the underlying performance of the business remains really robust, exception of Hesto, but Hesto we'll deal with in the outlook. And that's probably the most specific headwind that we faced within the group, and Anesh will cover that. So at the moment, my focus will be on kind of three companies. And Hesto, you could probably mention Ford as such. We've got four companies that are heavily invested in [indiscernible]. All those companies are doing really well, meeting their efficiencies, meeting their targets, meeting their volumes, as expected, according to business plan, et cetera. Hesto is the one that we are, for lack of a better word, fixing at the moment. There are significant complexity. So from the point that we were awarded the business, design changes, complexity changes over the 6 months have been absolutely extreme, enormous, unlike anything that we've ever seen before. So there's a huge commitment, not just from ourselves but obviously, more importantly, the customer and our technical partner, and I'll cover that again later. To ensure that Hesto meets its profitability targets, cash generation, business case, et cetera. So for me, it's really kind of a 6 months of really difficult performance, meeting customer requirements but forward-looking very positive. And that's very, very, very important. Mutlu as I mentioned, we've seen reduced export demand, Russia and U.S. So we are looking at rightsizing that business, commensurate with offtake or sales volumes. From a Russia perspective, it's obviously a sanctioned product at the moment. So we've got no chance to sell anything into Russia. And then into the U.S., I suppose you could say it's a little bit more geopolitical in nature. But there's still opportunity in the U.S. But for the time being, it's going on hold at the moment. So the second half of the year will be a little bit challenging. Hence, rightsizing of the business becomes very important. We're looking to expand export markets, new markets outside of the U.S. and Russia. Team is doing well. We've allocated a lot of time and attention and resources in developing those markets. So -- and we're already seeing some good traction. Yes, it's not going to compensate us for the loss of 1.1 million or 1.4 million batteries, but we're making good progress on that. So that's good. Lastly, on the Turkish environment, interest rates have hit 50% basically. So every Turkish lira that you invest in working capital or capital or otherwise is 50% interest. So the major focus, I'll cover that in the outlook, again, is obviously reducing working capital investment, overall exposure to banks, et cetera, and looking at alternatives to reduce that exposure. Obviously, in time, that will reduce. It's not going to stay at 50% forever. But for the time being, it's 50%, and it's really difficult to deal with. Rombat in Romania, yes, has been impacted significantly by Russia-Ukraine war. So we've seen that in terms of energy cost. We've seen that in terms of aftermarket volumes, et cetera. So Rombat was slightly loss-making in the first half of the year. They've made good progress, new customers, new export contracts concluded. So we expect them to turn around second half of the year. I'll cover that in the outlook, but that's obviously good. And then from an ESG perspective, there's some significant solar and green energy that we're investing in Romania at the moment. So from a strategy point of view and critical success factors, automotive components, which is mainly South African, as you know, our Metair companies are very well placed to meet current requirements and as we do, but also, more importantly, going looking into the future, there, we are very well placed to deal with changing technology. And our parts remain relevant, absolutely relevant and sustainable. So we do expect a progressive change in technology leading up to 2030, especially given the export side of the business because 70% of what we produce in South Africa is exported. So we will see definitely a combination of internal combustion, hybrid, plug-in hybrid, battery electric and hydrogen fuel cell production in South Africa. So there's a massive kind of fragmentation of technology and exactly where they will land. Unfortunately, or OEMs don't even know exactly where they're going to land. So our position at this point in time is reflecting on the products that we have, the relevance of our products and the relevance in serving in kind of those technology requirements. And on that basis, we are comfortable that we can continue to deliver and expand our market share. So our preparation for the change remains key, in line with our customer demand. We also need to think about solar and green energy transformation going up to 2030, exporting into Europe, it's going to be absolutely a necessity for us to be green in terms of how we operate, how we manufacture, et cetera. So that's something that's obviously not immediate, but certainly a transition that we see over the next few years. And then ultimately, a lot of where this lands in terms of technology will be informed by policy of government, which we expect to be released sometime in October. But certainly, I think on the back of the Stellantis announcement yesterday, I think it's a good sign in terms of where the policy is going to go in terms of supporting new energy vehicle initiatives from not only an OEM perspective but also from a component manufacturing perspective. Then energy storage wise, OEM and aftermarket remains really strong. We are prioritizing the replacement of export business, so Russia and U.S., which was significant. So that's obviously taking a lot of our attention. We still believe that we were placed to deliver on and to enhance based on requirements from customers, technology, lithium iron, et cetera, trading, not producing but trading through our existing sales channels. Internal combustion start the battery demand remains really strong in aftermarket and OEM at this point in time. In future, over the next 4, 5, 6 years, we do expect OEMs will require a different battery technology, not in terms of [indiscernible], but certainly in terms of auxiliary battery, so we may move from a 12-volt, which is a big battery to lithium-ion, which is a smaller battery or something else. But again, we are well placed to either produce or trade that in the future. And then I think very important is lithium-ion. We do have a lithium-ion line in Romania, which we invested in, I think, 5 years ago. At this point in time, our view is that further production or further investment in lithium is just too expensive. There's basically 5 major license [ ores ] globally, producers globally. OEMs will partner with them. The chemistry changes daily and is very specific to each OEM. And as such, I think apart from storage, where we do have an opportunity, we've taken the view that probably best to exit the lithium line in Romania, and we'll engage in a process to sell the line that's currently in Romania. And then obviously, potential value unlock or derisking options in terms of Romania, Turkey store front of mind in our thinking. So that has not changed. And then just lastly, before I hand over to Anesh, just a quick reflection on the results for the first 6 months is -- I mean, operating environment has been challenging. We have launched -- properly launched the largest single project that we've ever launched across 4 companies in our subsidiaries. We've had the impact of Russia, a loss of the U.S. sales, which has added to the short-term strain. But we're obviously very much focused on restoring the export volumes in new markets, et cetera. excluding Hesto. And Hesto, we will spend a bit of time on -- I'll spend a bit of time, I'm sure. Strong operating profit and EBITDA growth in the business. As Ford coming online, less of an impact of hyperinflation as we mentioned, I think, the full year results. But obviously, given the investment cycle, we are from an earnings per share -- headline earnings per share impacted by the higher borrowing costs, especially in Turkey, given where we are at the moment. Automotive components, mainly South Africa, Hesto is the main focus, upfront inefficiencies, design changes, offtake variation. Offtake means volume changes has been quite significant. But we see that normalizing and we have the -- not interesting, it was not interesting at all. We did have a facelift 3 months after launch. So we had to deal with the facelift 3 months after launch, which obviously created a lot of strain in the system, but we didn't let the customer down at all. Secondly, as I mentioned, we're strengthening the team to deal with all of these complexities and changes. Our technical partners are very involved especially on the Hesto front to ensure that we meet the efficiency and the targeted efficiency, et cetera, that we planned and that we can ultimately deliver the business plan that we approved. We're seeing daily improvements in efficiency within Hesto, which is a really good outcome. And we believe strongly that Hesto will be profitable regardless of what's happened in the last 6 months, once-off cost. And Anesh will go through that once-off cost or inefficiencies, et cetera. We strongly believe Hesto will be profitable for the second half of '23. And that is obviously with the support of our technical partners as well as the customer, not just ourselves, but the customer obviously understands design change and et cetera, what we're dealing with. As I mentioned, other group entities within the new Ford program continue to do really well. So it's isolated to Hesto at this point in time. We've got fantastic ways sedation, where we have got fantastic and other funders who else is -- sorry, you're all waving at me. Got exceptional support from all of our funders. And I think they've obviously got the benefit of the forward-looking business cases, which we can't share with shareholders. But on the back of that, and all of the activities that's ongoing, obviously, they are still very, very supportive of the business, and Anesh will go through kind of detail on that. And therefore, we do expect a really good recovery in automotive components in the second half of this year. From an energy storage perspective, Export remains the major focus of replacing a potential loss of 1.1 million batteries that are at risk. So the team is very focused on that at the moment. That involves new kind of markets, brands, product design, et cetera. So very happy to -- the progress on that is quite good. Rightsizing will be very important. We've initiated it. It's on track. So especially from a [indiscernible] perspective, regardless of loss of sales, we do obviously manage the business in line with the expectation. And then obviously, the options to mitigate higher borrowing costs in Turkey will remain top of mind. From a first battery perspective, business has rebranded to align across all of its segments. So automotive aftermarket, industrial, et cetera, including storage and solar. We do see good opportunity apart from just initial sales, but also potential replacement market for lithium is starting to come through. I think some of the systems that have been sold into the market by some of -- well, let me not say too much. There are some substandard systems, batteries, technologies that are starting to fail. And obviously, we, as a responsible -- very responsible in terms of quality, et cetera. Maybe we've been delayed a little bit, but I think we obviously back our product 100% in terms of warranty and capability, et cetera. So we do see that as an opportunity as well. In the aftermarket, we've grown market share across most of our territories. So that's really good. And then Rombat yes, impacted by inflation -- high inflation, energy cost, which is improving the loss of U.S. sales and obviously, continued impact of Russia and Ukraine complicating our environment. So I'll stop there.

Thanks, Sjoerd. Good afternoon to everyone. I think let me take you through the financial section of our presentation. A difficult and challenging 6 months, but I think just to reconfirm what Sjoerd has been saying positive for us going forward, especially locally from an OEM perspective, we've seen good growth. And you can see that in our turnover line for the year from a group perspective, 31% up from the previous year. A lot of that is generated, obviously, from the new sales we've been generating from our key customer, Ford and also the return to production of Toyota post [indiscernible]. The case of an impact has really driven that revenue and top line growth for us. And I think that's indicative of where we're going in the industry and in the country going forward. Obviously, Hesto and as you might know, we don't consolidate into the group numbers. I'll get into those details later. Most of these numbers would exclude Hesto from a group point of view, but I'll take you through a bridge in terms of how we overlay history into the operations. I mean, Hesto had good strong turnover growth but was impacted by significant complexities into the launch of the new Ford model. And as we mentioned, there was also a [ face lift ] shortly post mass production in December. The complexity is largely is around mix variations, around the ordering of parts, the long lead times that we had and the variability in what we call also daily volume pull from Ford. But subsequently, volumes have stabilized. We're reaching the peak of 720, as Ford mentioned in their capacitized plant volumes. So since those impacts in Q2 of this year, operations have improved greatly. From an EBITDA perspective, we've increased from 529 -- I mean to 529, 76% increase. And operating profit or PBIT in short, increased 124% to ZAR 324 million. On a normalized basis, it's just over ZAR 0.5 billion A lot of that growth was generated at Mutlu. As you know, we do report Mutlu on a hyperinflation basis. That means we do the state numbers out of Mutlu. And we were happy that we actually incurred a loss of ZAR 44 million last year, but we've improved to a profit of over ZAR 160 million for energy components and largely driven out of Mutlu. From a net debt perspective, it's increased to ZAR 3.2 billion from the December position of ZAR 2.6 billion. And as we said, largely driven by the peak debt levels because of investments that we carry at the moment for our new model but also largely a lot of working capital. The working capital has increased by around ZAR 500 million, split evenly across verticals, but largely in our auto components vertical. We are carrying a lot of safety stock at the moment because of the supply chain disruptions that we had in the past. And we're looking at that unwinding into the second half and be more cash generated from a working capital point of view. Cash generated from operations before working capital positive, nearly ZAR 0.5 billion. But we did, as I said, about ZAR 500 million of working capital. So really from an operational point of view, still negative. Free cash flow utilized ZAR 384 million, a slight improvement from previous year due to the auto component recovery from the floods in the previous comparative. Headline earnings per share, ZAR 0.41, 9% down from the previous comparative of ZAR 0.45 per share. But as we mentioned before, the high interest rates and borrowing costs did hamper after-tax profits and largely, a lot of that interest cost. Interest costs did move up to -- by 125% to ZAR 280 million. A large part of that is generated out of Turkey with the high interest rates and borrowing costs at the moment. From a debt financing point of view and from a Hesto point of view, we have received the support of our funders. Covenant [ condonement ] has been issued to us for the June position subsequent to year-end, and we're working on waivers on the forward position, at least well into next year. So from a funding point of view, in general, we've received waivers in terms of the Hesto debt. From the Metair CTA point of view, yes, we're working on that. We do have one funder that's allowed us relaxation in terms going forward. I'll get into that detail. And we're working with our other two funders to get that over the line, but negotiations or discussions have been positive going forward. For [indiscernible] operational point of view, I think from that scrap, we recycled a lot of rate in the group, nearly 30,000 tonnes for the 6 months. From an ESG or lost time injury frequency rate, we've improved to 0.16 compared to 0.2 in the previous period. So that's well done to the operational teams. From a supply chain perspective, yes, we did carry a lot of stock. We will unwind this into the second half, and we'll unwind also a lot of working capital in the Energy business as we lead up to the busy or peak season, as we've always said within our operations. Key customers or top 2 customers , Toyota and Ford, their volumes half-on-half have been up 37%. So there's strong growth in our auto business. To go through the income statement and largely this group income statement, ZAR 7.6 billion turnover, operating profit of ZAR 324 million, up 124%. Net interest cost really increased quite significantly to ZAR 280 million from a comparative of ZAR 125 million. Associates line, so the associates profit that we normally take into our P&L was a slight loss of ZAR 10 million. But importantly, this number doesn't include the results out of Hesto. Hesto did incur an operating loss of ZAR 711 million, an after-tax loss of ZAR 417 million, largely because of the complexities in the first half. But because we account for Hesto as an associate and in terms of the shareholders' agreement and accounting rules, once you've hit 0 in terms of your investment write-off, you are not required to consolidate those losses into your balance sheet or income statement. So effectively, where we are for the first 6 months. And in terms of the accounting standards, we've reported a HEPS of 41%, but that largely excludes Hesto. And we will accrue or start accruing for profits from Hesto from the point in time when we actually make up profits to cover those losses. And we estimate that to be around in 2025. So largely from our overall income standard perspective, profit after tax of ZAR 108 million. We've got a financial or a hyperinflation gain of ZAR 180 million. For Metair, this period, the severity of hyperinflation for the first 6 months was quite less, so quite less severe than we had in the previous period. But we do see some upward or challenging conditions in the next 6 months, which we'll navigate through for the rest of the year. Metair's effective tax rate is 49%. And largely, it's quite high tax rates in Turkey at the moment. CIT rates have increased quite a bit, and it was a special earthquake tax as well in the country, following the earthquakes around January or February. I've explained the Hesto position in this ZAR 427 million that's not included in this income statement numbers. From an other income point of view, just to highlight, if you remember, we did accrue for some of those flood claims from our stoppage at our major customer. So other income has declined from ZAR 350 million to ZAR 120 million, largely because of those flood [ gates. ] From a balance sheet point of view and a debt perspective, so noncurrent assets have increased quite a bit, and that's because of the hyperinflation impact. The strong asset base that we have in Turkey protects us against hyperinflation. So that's quite a valuable asset that we have at the moment. The group funding technically at June, we had to classify is current, although we have implemented corrective measures in terms of the covenant bridge going forward, and that will be remedied, but we had to incur classic rate that's current debt at the June position. And then we are actively engaging our funders to extend maturities going forward. ROIC, as reported 5%, that's because of the high investments that we've made into the operations. It's the first year of full production. And we were hoping to see returns, and we will see returns in the next year. And on a normalized basis, our ROIC is 11.7%. If I just unpack working capital, just a bit for us. I mean, largely, we do see the increase in turnover, so that we had to support that from a working capital point of view. We had stronger sales in auto components, but also we had complexity in terms of daily volume offtake and as well as material escalations in terms of costs. Other increases we build up for the batches is in the high 2 -- in H2, sorry. Lead prices in local terms have been much higher. And the customer mix profile, especially from Mutlu and losing the Russian-U.S. -- sorry, Russian and U.S. sales has affected the debtors book, but because normally on exports, we do recover a lot of that cash upfront. And temporarily, we've lost that hedge in terms of the debtor's book. We do have higher safety stock levels in our auto components business, which will unwind into the second half. From a debt perspective, just to unpack that a bit more simply in what we carry at the group, we had ZAR 2.6 billion at December year-end, ZAR 1.2 million belonging to Hesto that we bring on to the balance sheet. We did raise a bit of working capital at Mutlu, minor increases in the rest of the business. And we've raised additional funding at Hesto, largely because of the financing we needed to fund the ramp-up. At June '23 position, net debt, if you include Hesto, ZAR 5 billion, and we're looking to unwind that to just below ZAR 5 billion, especially from a group perspective, we will move from ZAR 3.2 billion to ZAR 2.8 billion once we unwind some of that working capital level. As we have mentioned, interest cost is quite high. We would see short-term high interest costs in the next 6 months. The Turkish market rates now is probably between 45% to 55%. So we will see a high interest cost in the next 6 months and will unwind from next year as we improve the capital structure and online working capital from a Mutlu perspective. From a net debt perspective, and especially funders' covenants -- just to go through it quickly, where we are, we did agree with one of our main funders to increase the leverage ratios. So we do move from a dividend and interest ratio from 3 to not more than 2x at June from not more than 2.5x at December to not more than 4x in June. Another priority that covenant, not more than 1x to not more than 2x, sorry, June 2023. The funding is high. It is at peak debt levels of ZAR 5.2 billion but we will look to reduce debt by year-end to just below ZAR 5 billion. We are engaging with funders to look at the extension of Metair's debt, especially some of the short-term funding debt that's due next year. And while we do that, we will look to -- look at a group refi in terms of our capital structure, debt structure, hopefully by Q2 in 2024. So in terms of normalizing the result and once we bring in Hesto, it's a high-level analysis. It's on the base-to-base calculation that we had in previous year. If we bring in -- and if we just talk about EBITDA from a first 6 months perspective, once we bring in Hesto's losses, it's an EBITDA of ZAR 88 million, but we're dealing unusual costs, as I've mentioned. And we've quantified that at the Metair level, ZAR 369 million, we'll get to a normalized EBITDA for the first 6 months of ZAR 600 million compared to ZAR 743 million in the previous period. From an earnings adjustment point of view, it's quite a lot of analysis we did, which we can take back. But this is just to put it from a group perspective, energy and auto components perspective and what I'd like to highlight here is that once we exclude Hesto, the auto business produced a profit of ZAR 263 million, which is largely comparable to the previous position. From an energy perspective, once we take out the impact of hyperinflation, we reached a profit of about $291 million. Hyperinflation is for notes, but this one I highlighted drop in hyperinflation or CPI rates in the 6 months to this year to 20%, which had a less impact on the numbers we produce out of Mutlu. From an IFRS reported point of view, I did touch on that group profit, operating profit, ZAR 324 million. From an operating profit analysis position, largely, we can see if it was quick shortcut bridge from H1 ZAR 144 million to ZAR 324 million, good profitability coming out of Mutlu. From a normalized perspective, energy storage comparable at ZAR 291 million, a large part of this was Romania. We did incur an ZAR 11 million loss that we are hoping to claw back in the second half because Rombat is quite a second half business. From an auto components, we improved to the ZAR 45 million operating profit once we add back all of those unusual costs. From an automotive components volume point of view, we can see our top 3 customers cumulatively up 21% from the previous period, really driving the growth in revenue to 147%. From a PBIT perspective, unfortunately, because of Hesto, we had ZAR 448 million operating loss. But from a group perspective, remember, it's excluded because of the underlying associate accounting. From an energy storage perspective, volumes impacted by the loss of exports really affecting Mutlu. So we're down to 3.6 million units from a Turkey perspective. A bit of softer volumes out of Romania, which we will recover in the second half. A good performance, top line from South Africa, and that's [ AFP ] perspective, 10% up on auto, but we did do a strategic initiative to grow back sales, which didn't translate fully into operating profit but will in the second half. Analysis, segment analysis, really, this is what we show normally, it is little bit visibility in the businesses, and we can see good profitability out of our -- sorry, aftermarket automotive volumes of -- sorry, ZAR 315 million compared to ZAR 273 million. From a CapEx perspective, largely on track, we did budget for ZAR 750 million worth of CapEx. We did spend ZAR 316 million as planned. There is budgeted CapEx of about ZAR 440 million, but largely, we will look at where we're spending that CapEx, especially on maintenance and look to only spend on essential maintenance and curtail nonessential expenditures where we can. All funding at the moment is raised at subsidiary level for CapEx. And largely, where we look to spend, we do have solar projects going on at Rombat, and we do have some AGM technology projects in Batek line coming onto line for [ AFP ]. And there's some residual wire and suspension CapEx that we indebt to accrue in our suspension and wire business. From a forward project point of view, largely revenues impact at least ZAR 60 billion, a large part of that goes to Hesto. Volumes, daily volumes have stabilized since June. But to customer design changes, project or product complexity has introduced complexities into the Hesto business, which has normalized since and the business will be profitable in the second part of FY '23, together with customer, our technical partner made this commitment to make sure Hesto is a sustainable business going into the future. Thanks.

Thanks, Anesh for that financial outlook. I'm sure there's going to be lots of questions that's going to come our way. But just the concluding remarks, it's been a tough 6 months. I think the outlook remains really positive. And we are very excited about the outlook. The new investments that we've made, especially in Hesto, I mean, we've gone from doing no business with Ford to doing probably ZAR 4 billion in turnover with Ford. So it's 0 to 100 and I mean, of course, it's going to come with some complexity. But what we're really confident on with the support of our customer, our technical partner, et cetera, is that, that business will recover in terms of profitability, cash flow, et cetera. That's the big focus for us at that moment. And therefore, the new investments that we've made will drive market share growth, excluding any other projects that's currently on the horizon, combined with the OEM production in South Africa, which is still very positive. Relationship with OEMs, our main OEMs at this point in time is Ford, Toyota. Let me rephrase that Toyota, Ford, VW, et cetera, remains absolutely key. Staying close to them, meeting their requirements, their technology changes, et cetera, will be absolutely significant for us going forward, and we're well placed to deliver on that. As Anesh mentioned and I mentioned earlier, we expect a big recovery in Hesto performance, and we do expect an operating profit in the second half of this year. It's a combination of efficiency improvements, repricing, et cetera. So the outlook for that business is still very good, regardless of the 6 months that we've had and I suppose long term, our guidance has not changed. So we will get back to the 7% to 9% as we've guided to the market previously on turnover once production stabilizes, which is largely the case at the moment. From an energy storage perspective, aftermarket OEM sales remain really strong. Market share is really good. But of course, we need to address the export markets and replacing export market losses, which is of primary focus for us at the moment. Storage and solar solutions certainly will add to the potential of this vertical over the next foreseeable future. And as we've mentioned, Turkish interest rates do bother us, and therefore, we need to minimize our working capital and leverage within Turkey. So we need to get that down to a level that we're very much more comfortable with. And then in terms of capital allocation and returns, yes, overall, significant tension, we've dealt with supply chain disruption and additional safety stock, et cetera. In OEM business, we're dealing with high working capital at the moment in Mutlu and a big focus on reducing that and aligning that with our customer demand. Big portion is over the next 2 years, definitely ensuring that we effectively positioned for the future regardless of where the technology goes between OEMs, et cetera, our product portfolio remains really relevant, and we just need to ensure that we keep track with that. And we've got the full commitment from our customers from that perspective. And then overall, we invested in 15 companies. So we continue to review the portfolio that we own. Then may be some optimization and derisking options within the portfolio that we will continue to assess in the coming months. And I think you got the clicker. I got the clicker. You got the clicker. Yes. So that concludes our presentation. So we -- at the Q&A phase, so happy to take any questions at this point...

[Operator Instructions] We have a question from James Twyman at Prescient. How big is the new sales hit from Russia in Mutlu? I thought much of those sales were already reduced in 2022. Is the net debt of ZAR 5.2 billion in the presentation or ZAR 4.9 billion in the press release? What is the annual expected sales with Ford at Hesto and outside Hesto in 2023? And will it rise in 2024? Or is it running at expected levels now? Do you expect the 49% tax rate to be the number for the full year?

This is you Anesh. Just repeat one by one, please.

So the first question, how big is the new sales hit from Russia at Mutlu? I thought much of those sales were already reduced in 2022.

So what I can say -- I'll answer that one. We did have some sales into Russia up until end of March this year. So last year, there was no impact because it wasn't sanctioned. I think at the end of -- not I think, I know at the end of beginning of April, the EU issued a new sanctions list of products going into Russia and that included starter batteries for the first time. So based on that, we stopped exporting to Russia from effectively the 1st of April this year. So I expect the hit in terms of volume, I can't give you the Turkish lira equivalent, it is probably around 350,000 units for the year that we will lose from Russian sales.

Thank you, Chad. The next question is whether the net debt of ZAR 5.2 billion in the presentation is correct or the ZAR 4.9 billion in the press release.

Yes. So there's 2, in fact, 3 levels of debt because of the structure that we have with the funders. There's a level of debt on a group basis, which is the ZAR 3.2 million -- billion, sorry. And there is what we call the CTA funding debt or the Common Terms Arrangement debt, and that is the debt that we calculate in terms of the funding agreement, in terms of the covenant agreement. So there are some adjustments to that debt number. And that includes Hesto and it also includes the companies that we have minority shareholding in, which is Smiths and Mutlu, that we do a bit of minority adjustments on and debt accumulates to the ZAR 4.9 billion. So ZAR 4.9 billion is the main debt number that we look at because that's our covenant basis. ZAR 5.2 billion is a basic aggregate of Hesto as it stands 100% compared to Metair at the ZAR 3.2 billion.

Thank you, Anesh. The next question is what is the annual expected sales with Ford and Hesto and outside Hesto in 2023? And will it rise in 2024? Or is it running at expected levels now?

So it's running at anticipated as we planned levels for this year and next year and will raise up from the year 2025 onwards based on intel of what we see in the volumes going forward. I mean largely, overall, it was ZAR 60 billion that we have doubted it probably will be a bit more. We need to look into what the complexities are going forward on the volumes from a Hesto perspective, the turnout for this year would be close to ZAR 4 billion or ZAR 23 billion, sorry.

Thank you, Anesh. The last question from James. Do you expect the 49% tax rate to be the number for the full year?

It depends on a lot of things. Turkish government for one. But in any case, I mean, on an annualized basis, I would estimate it to be between the 40% to 49% range. A lot of it is distorted. I mean we don't have the actual cash or tax normalization, but there are a lot of intricacies in the tax calculation. And because of the low PBT that we have at the moment, especially on hyperinflation and no associated profit, that range would be around the 40% to 45% mark, sorry, for the full year.

Thank you, Anesh. We can see if there are any questions from the floor?

It's Andrew Moses from Meta. A couple of questions. How much interest was capitalized this year and last, if you can you tell me?

So from an interest capitalization point of view, there's been very minimal interest capitalized on to the group. It's all written off. We don't capitalize any borrowing cost as most of these contracts and the assets in progress have been below the 1-year threshold. So it's all P&L related, which was, I think, for this year, this first half, the ZAR 280 million net.

Great. And then when I look at the cash flow, there hasn't been cash generation for a couple of years now. Obviously, there's been lots and lots of CapEx put in the ground. But if you look from an operating cash flow point of view, basically, more than profits as it ends up in working capital for the last couple of years. Is -- do you just hold working capital at this point and raise turnover? Or is there ongoing absorption of working capital? Or what happens? Just when I look at it, funding the debt becomes problematic if you can't generate cash out of the operating business, which has been the problem for the last couple of years.

Yes. So there's 2 -- I think in energy storage, we've been very focused on growing volumes. It's a commodity-intensive business. So as you grow volumes, earnings, unfortunately buying lead to funding working capital, et cetera. So I think this year, given the outlook, it may reverse. And these businesses are interesting if you want to generate capital or generate working capital, you need to wind down the business like gradually. So I mean that's just the nature of the business. And then secondly, on the automotive components side is we've invested heavily, absolutely heavily. I mean we're talking a run rate ZAR 6 billion turnover per annum. That doesn't come without working capital investment. So what we're aiming for is at the moment, we probably -- and Anesh didn't mention it in the slide, but we're running at around 80, some 86 days net working capital investment. Our aim is to get that below 70 right? So back down to 68%. So that just takes a bit of normalization. So what we've had in the past year or two and not to dwell on it, but the last 3.5 years have been crazy, right? So we've had COVID, we've had strikes. We've had riots, we've had flooding. We've had everything. So we've had to put a lot of safety stock, right, in the system just to keep our customers going. And I think now for the first time, we actually see like if everything is starting to normalize, and now we can actually gain some traction on effectively managing that working capital down to a level where we think it is sustainable, where it should be. With the exception, as Anesh mentioned, previously, we had big export volumes out of energy. And especially the Russian ones, we didn't send a battery to Russia without getting the cash, right? So that's the one thing that will -- obviously, we're not -- that's going to remain. So I think to answer your question, we're now in a position where we can actively work on getting the number down, getting it down to below 70 days, 68 days, 65 days is probably where we want to be. And that is commensurate with kind of call-offs volume, customer volumes, export volumes, everything. So yes, that's where we want to go.

By December, this year or December next year or...

We'll be progressively working towards below 70. We'll definitely gain something by December. Whether we're already at like the 65, 68, we need to kind of -- we need to check, but obviously, in the midterm, short to midterm planning, that's where we want to be. So by late this next year, hopefully, by December, we can show some good progress.

Covis from [indiscernible] Capital. Just want to go to Slide 30, where we do the revenue split for the project. So 63% from harnessies. So does that mean that you just take the 63% down to ZAR 60 billion, so that's about -- roughly about ZAR 38 billion. So just on the -- so is that the proportional share that met your hands or is it...

That's a full.

That's full. So if I take the ZAR 711 million loss this year from Hesto, at the 70% margin, that's about ZAR 10 billion that you guys need to make before you guys can start reporting it in the income statement again?

No, it's more complex than that. Anesh you deal with it.

No, it's -- yes, it is much complex, obviously. It depends on a lot of factors that go into the cost of the material. And obviously, when you count it back, we need to take into account 75%. So our estimate is not really making up ZAR 10 billion of turnover, it is really making up the operating losses that we've had. And that we would see materialize not next year, but the year thereafter probably in the second half of 2025.

Okay. And then just there's a statement in the presentation of Hesto being profitable or should be profitable in H2 this year.

This is H2.

Does that include -- if you separate Hesto pre the Ford contract and the Ford contract, is the Ford contract also positive? Or is it the stuff excluding the Ford contract?

I would say at this point in time, it's as a company.

You can't say the Ford contract is profitable?

What I can say is there's a lot ongoing. Hesto primarily serves two customers; it's Toyota and Ford, right? We've got a commitment from the customer. We've got a commitment from our technical partner and obviously, we committed more than ever to make the Ford business profitable, sustainable or cash generative, et cetera. On top of, obviously, what we're doing with Toyota. So the Toyota business is still profitable. That's running very well. No issues on the Toyota business at all. The big thing that we need to do is -- and there's a whole process ongoing is to correct the Ford business model in line with our expectation. So ultimately, where we need to end and where we believe we will end is that both Toyota and Ford business will be profitable by the end of this year. So that's the intention for Hesto, certainly. And what we can say is, obviously, post June, combines Toyota and Hesto, the company has been profitable. So we're not seeing the ZAR 700 million operating loss and one-off costs and et cetera. So the company is profitable. Obviously, Toyota has got a big share in that. So Toyota is very profitable. Ford is still something that we're working on, but we believe we'll come out with a good result given the discussions that we're having with Ford, technical partner, et cetera, by the end of October, beginning of November. But more than that, I can't really share at this point.

Okay. And then just last question. On the $57 million loan to Hesto.

That's just a guarantee.

Is it just the guarantee, because there's no money that flow. So that's not part of any [ data ].

Yes.

Bruce Williamson, Integral Asset Management. You -- on the back of the Stellantis announcement, I mean, you seem quite positive on what government might say. Can you share any ideas that you might have?

I think it's premature to kind of speculate and I don't want to put words in like government's mouth or anything at this point in time. But I certainly believe -- So let me, I suppose, conceptually talk about it. Government's got a -- if you look at SAM and APDP, there's a 60% localization content target. If local producers start producing battery electric vehicles, right, which some of them may, some of them may not and some of them may be isolated to Europe or Thailand or whatever. But the battery, the content of the battery in the vehicle is 50% to 60% of the value of the vehicle. So there's no way that you can actually achieve 60% local content unless you get an exclusion or an exemption on importing battery and cells and the chemistry and whatever. So what I expect and what I suspect is there will be some leniency in terms of its electrical drivetrain that, that will be exempt. And then we will follow typically the localization process, which means over time, import the cells and then there's value add. So import, assemble, produce the pack, et cetera, but that will come in time. But initially, I do expect potentially on the battery side, some exemption because from a component, there's just no way that you can get to 60%. But the fact that -- and I mean this is pure speculation at this point. The fact that Stellantis have announced what they have announced, they've obviously, I believe, reached some kind of consensus before announcing their potential investment. So that's all I can say at this point in time. And we'll be engaging with them quite strongly.

Great. And then you sort of mentioned that the global manufacturers and OEMs are themselves uncertain where the technology is going. It's just like what's going to happen next week -- but you seem quite relaxed that you would be able to cope. I mean if they don't know where they're going, technology is changing, aren't you going to be in this perpetual period where you keep on trying to catch up the lease?

No. So I think if you look at our product portfolio, and that's quite significant. So we're in suspension, we are in plastic, we are in batteries, going to start the batteries, lighting and harnessies primarily. Those are the first components that you want to localize, right? You don't want to be shipping harnesses anywhere. Like given the complexity and design change and just mix and et cetera, and everything -- so we're very confident like before an OEM makes a decision on where they're going with their technology. If you ask them today, they'll tell you, listen, we don't exactly know where we're going to be in 3 years' time. We can tell you it's going to be 1 of the 5 kind of technologies. And I can tell you now there's definitely going to be hybrid and plug-in hybrid. But the next step, whether it's battery or hydrogen, that's the big step. And that is the one that we are kind of, I would say, protected from because we're not that exposed to it. So whether it's hydrogen, whether it's battery, we're not delivering battery revenue, et cetera. I mean it's not that significant. There will be an auxiliary battery. But 2 or 3 years ahead of the technology change is when our technical partners and us need to get ready. So it's not going to be like overnight, all of a sudden like we're doing this. So there will be sufficient time for us to stay connected with our customers to prepare as they prepare and as they finalize their plans. So I've got very high confidence in our ability to kind of whatever the technology is, our products remain extremely relevant and will not be kind of subject to kind of not continuing doing business with them. So for me, that's -- ultimately, that's the Metair design. So that's very important.

Tinashe from Laurium Capital. So just looking at your recent experience with the ramp of the Ford contract, you attributed the losses to scope changes, design changes business. Or do you imagine that when you sit across from your customers, you actively price with these factors, you try and protect the business and profitability. You manage again how does it actually work and how do we recover from the solid losses you've had in the first half?

Yes. So that's a big topic. Let me try -- let me try and condense it. So typically, what happens is we quote for business, right? So you quote on a specific design. That design could change. So as they do the prototype vehicle builds, et cetera, that design -- the especially in the harness business because that's the one we're talking about. Okay, that's why it's too short, this one is too long, change design, change this, change this. Now we're adding infotainment or we're adding more speakers. So we adding this or that or whatever. So it constantly changes. So what happens is there's a formal design change process that we go through. If the design changes, then you quote for the design change and then you price it into the product. okay? So that's the phase that we're going through now. So there's been like 2,000-plus design changes, which is extraordinary. So the first focus was obviously just keeping the customer going and delivering according to the customer demands, what we're dealing with now is how do we recover and how do we do -- listen, this is what we quoted on. This is what we're delivering. How does that look? And how do we recover that going forward? And that's why we're saying that's the process that's currently ongoing. And that's why we're confident going forward that a Hesto will be profitable and cash generative. Things like air freight, labor inefficiency, et cetera, there's some of the things that are normal to any major project. So if you ask any customer of this magnitude and the project of this magnitude, I will tell you there's no way that you can expect to be profitable in the first year. Of course, we're working together and we're helping each other in terms of efficiency and pricing, et cetera. But this -- I mean, yes, -- you need to learn. The learning curve is steeper than expected because the complexity is now completely changed. It's exponential complexity from what we initially anticipated. So the cost that we incurred in the first 6 months, for me, the most important thing is we draw a line in the sand. Right? End of June, we say that's it. Okay. We can -- there's still a discussion on going. Maybe we can recover some of those costs, some of the inefficiency, et cetera. That's not certain. But for me, the most important thing is beyond ramp-up because now we've reached on normal volumes at run rate, the mix, the complexity, everything has kind of settled, right? So there's no further uncertainty at this point in time. Is that beyond June, it's a completely different story. So for me, that's the most important focus. And then what we can claw back -- if there's any clawback in terms of pricing or one-off cost, et cetera, for the first half, maybe we can do that. Maybe we can achieve it. But I think it's -- yes, the major focus is beyond June, it's in the right direction.

It's [ Jan Kruger ] from [ Prescient ] Pty Limited. I have 2 questions. I hope you can answer. The first one you say you had something to do with lithium mining in Poland. Is it spot you mean or lepidolite that you were mining?

Yes. So we're not in mining at all. So what we had is we had a lithium-ion production line. We have a lithium-ion production line in Romania. That line is equivalent to kind of 0.1 gigawatt and at the moment, we're not producing anything from the line. It's still a valuable line, but I think given the change in chemistry and given the rate of change in automotive kind of requirements, that line is now only fit for purpose for storage. So there is demand.

So it's probably [indiscernible].

So -- but it can do NMC, it can be lithium-ion phosphate, it's about sales, but we're not mining. It's bolting chemistry and we can produce the [indiscernible].

I asked the question because I'm [indiscernible]. People have made a clear distinction between the 2. But -- and the second question, which I hope you can answer. There was a notification that Ninety One now owns for a 5% of Metair.

Yes.

Can you give me any more information than that?

Ninety One. I mean they've been oscillating between 5% and 10% over the last kind of 5 years. So I mean it's not -- nothing extraordinary, they have been as high as 8%, I think, as low as 3%. So it's...

So you don't know anything about their motivations?

I mean, we know them well. I think they're motivated. But the way they manage their funds and who sells because they -- it's across kind of 3 funds -- 3 portfolios, et cetera. So it's -- yes, I mean.

We probably take one more from the webcast, and then we'll have to take the rest offline. So the last one from the webcast from Paul Woodburn of [ Rosendal ]. How does the Ford Hesto issue impact the ROIC and IRR of the project? Is there any chance of recovering these losses over the term of the contract?

Yes. So we've had upfront cost, more than expected, but we do still believe over the 10-year project that we will be in line with our business case. So nothing really changes. I think from an IRR perspective, obviously, we've got more upfront costs, so kind of time value of the upfront cost is going to weigh more on the IRR. But overall, going forward, we do believe that we will be, from an automotive perspective, total segmental, we will return to the 7% to 9% margin. And that means that we will recover the cost, but it will be future.

Thank you, Sjoerd. We're probably finished for now. Thank you.

Thank you, everyone.