Nampak Limited (NPK) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Nampak pre-closed period call. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Erik and Glenn. Please go ahead.

Good morning, ladies and gentlemen. This is Erik Smuts speaking. So I assume most of you are dialing in from home. I guess, across the world, most people are either in lockdown or self-isolation. So I think very abnormal circumstances that all of us are experiencing at the moment. But I guess, all of us are used to or getting used to it as we speak. So I take it all of you have gone through the SENS announcement that we sent out, so I'm not going to go through it in detail, but I'm still going to run through the key details in there. And so maybe to start off with, I'll -- just to summarize, I'll go through the market conditions in our major economies, and at the same time, to a large extent, give the regional updates as well where appropriate. We will, obviously, also discuss the decline in trading income from Angola, which is a key issue. We'll later on go through the proceeds from the disposable, notably our Glass operation and cartons, Nigeria. Then, we'll address liquidity in our rest of African businesses, specifically Angola and Nigeria. And we'll talk about the relaxation of the covenants, COVID-19, of course, and generally, the theme of the reservation of cash given the COVID-19 pandemic. So what I would like to do is I'm going to start with the market conditions in our major economies and to some extent, the regional update. So the first market I would like to discuss. This time around, it's not South Africa, I'm going to talk to Angola first because I think that is probably where we've seen the key movement in this particular period. First of all, I think as you would have seen, just subsequent to our year-end, at the end of September, there was quite a notable devaluation. So during the period, and of course, we're, today, only talking about essentially the period up to the end of February. Although as you would have seen in the SENS announcement, we also mentioned some of the key issues that happened during March. So up to the end of February, we've seen a 32% devaluation in the kwanza. That obviously puts additional pressure on the disposable income or affordability of people in Angola. And as a result, we have seen a further decrease in our beverage can volumes. And as a direct consequence, our trading income, we have disclosed, is at near breakeven levels. So clearly, very little trading income we can expect from that market from the period. But at the same time, if we look at the cash balances we have in country, we can report that 56% of that is currently hedged. We have disclosed the numbers in the tables in the trading update. But to give you an idea about -- yes, so like we say, just over half that cash is hedged in U.S. dollar-linked kwanza bonds. And clearly, we had very good extraction of cash out of Angola as well. So at this point, there's actually quite a low value of bonds still left in country. In Nigeria, I think just 2 issues to mention there. First of all, I think the demand for beverage cans has remained strong, so we still have growth there. And other than that, it's probably worth mentioning that cash levels are at optimal levels. So we don't have a big exposure of monetary items there. Of course, if there's a devaluation, which we expect, by the way, for the coming period, I think we have done everything possible to reduce the cash exposure. But of course, your normal working capital will be exposed to any potential devaluation. Next market is Zimbabwe. The economy continues to contract. As you know, the Zimbabwean dollar devalued by up to 18% to the end of February. During March, it suddenly devalued further to ZWL 25 dollars to the U.S. dollar, which is where it's also now pegged. But I think it's worth noting that Nampak has not provided any cash into that country since April 2018. All purchases of raw materials are funded by dollars, et cetera, that we get from our customers. Essentially, Zimbabwe is the only country where we experience significant problems in obtaining ForEx, clearly not Angola and also not Nigeria, although Nigeria is definitely tightening and is getting more difficult. Then, if I return to our, normally, what is our main market, South Africa. I don't think I need to say much about the current state of the South African economy. It is clearly a very challenging trading environment. Traditionally, over the holiday season or up to the end of December is our peak period for trading. And needless to say, the economy was very weak. Of course, the COVID-19 has turned this economy on its head, and I'm sure it's going to do the same for everywhere in the world. As you would have heard, South Africa has gone into a 21-day lockdown, as announced by the President, and that's effective from 26th of March. I have to mention that most of our products are considered essential products or services. Therefore, most of our factories are still allowed to run. We have implemented business continuity plans throughout our businesses, basically to ensure that we minimize the impact on our employees. Clearly, the health of our employees is our key concern. We're also ensuring continuity of supply to our customers. And after a detailed risk assessment, we are quite happy that our inbound supply chain is secure. We've got adequate raw materials, so there's very little concern at this stage on that front. Of course, on the demand side, I think that is a bit unknown. We're not sure what is going to happen, and obviously, that will only get clearer during the second half of our financial year. What we can say is that we expect demand for beverage cans to be impacted negatively, mainly due to the ban on the sale of alcoholic products. And clearly, a lot of the cans that we produce is for the alcoholic market. On the other side, we do expect that the food may inadvertently benefit from a short-term spike in demand for food cans, but we do not expect that to last too long, and I don't think it will have a material impact on the results. If I move on to specific divisional updates. If we look at Bevcan, in South Africa, Bevcan continued to defend our market share. I think we've done pretty well under the circumstances. Yes, we have lost some market share, but I think it's fair to say, probably less than we expected. But the negative was due to the overall South African economy, overall demand for beverage cans was negative. So in other words, I'm not talking about the specific volumes for only Bevcan South Africa. The overall market for beverage cans in the country was negative, and that includes the demand on all our competitors as well. So as a result, in making sure we remain competitive, we have implemented further cost-saving initiatives. I think the team has done well there. We have reduced our overhead costs even further. We are in the process of restructuring one of the factories to take out further crudes. That is in progress and proceeding in line with plans. Bevcan Nigeria, I think we're pleased to report that we managed to debottleneck the production line there even further. We have the view that we can produce up to 1 billion cans on that line per year. And as a result of that, we do not see the need for any short-term CapEx investment there. I think the -- any thoughts of a second line for the moment, I think we will be very careful before we invest in the second line. I think for the moment, we are very well capitalized throughout the Bevcan business. And before we put in a second line there, I think we will wait for the market to grow quite a bit more. So yes, any idea for major CapEx there, I think we can push out a couple of years. If I then move on to the food business. The business has been characterized by lower volumes. As you know, due to a loss of a key customer during the second half of 2019, clearly, the economy in South Africa is also weak. And as a result, the division has started implementing quite an aggressive rationalization program, basically looking at the consolidation of some production sites in order to reduce overhead costs. And we are very confident that although the business, at the moment, is still loss-making, we will be able to return that business to profitability. On the plastic side, we've managed to improve profitability despite lower market volumes, and that's been on the back of some restructuring. And I think the management team of the plastics business has done a particularly good job. On the Paper side, our business in Zimbabwe, Hunyani, has remained strong. The demand has remained strong, but they did have some challenges in getting adequate supply of raw materials, mainly due to the liquidity shortage. And then lastly, our Cartons Nigeria business, the results will only be included for 4 months, as it was sold in January 2020. I'm going to hand over now to Glenn, that will talk you through the proceeds from the disposal of our businesses, et cetera.

Good afternoon to all, and good morning to those overseas. The proceeds from the disposals, there are essentially 3 disposals that have taken place since we spoke last regarding the results to September 2019. I will deal with the first one, being the Cartons Nigeria disposal that was approved by the Competitions Commission. All conditions have been met. The EUR 29 million have been deposited into our Isle of Man bank account. So there's no risk of dollar shortages anywhere in Nigeria to get that cash back to us in Nigeria in Isle of Man. So that's a good transaction, and that has been successfully completed. The Glass transaction, which became effective on the 28th of February 2020, with all the expensive conditions were fulfilled or waived. That is due to complete tomorrow, with proceeds of approximately ZAR 1.5 billion expected tomorrow. What we will do with those proceeds is initially reduce rand-based debt. I think with the movement in the currency, I think the rand has probably oversold itself for the moment and we wouldn't be looking to settle foreign debt with that. We will, however, immediately use the proceeds from the Cartons Nigeria disposal to settle the portion of the overseas debt that we have on that particular debt profile. And what we have done with the Nampak Plastics Europe business, that transaction was completed on the 13th of December 2019. And in principle, the business was sold for a nominal amount of money. We have had to make 1 year's contribution towards the pension fund liability. And if I can remind you that was defined benefit pension fund liability, which we had not been able to deal with in previous periods in terms of disposal. We've managed to dispose of that business. Together with that liability, we had a balance sheet liability of approximately ZAR 500 million that will come off our balance sheet as a consequence of that transaction. In addition to that, we have -- will avoid a capital expansion program there of approximately ZAR 600 million, and also avoid any further trade losses in that market. So I think that completes the trio of those disposals and the expected pricing of approximately ZAR 1.9 billion. In terms of the covenant relaxation, the Nampak covenants are possibly susceptible to a sudden weakening in the rand versus the dollar when it happens late in the measurement period. How did covenants work, is there are essentially 2 legs per covenant. The first being net debt to EBITDA covenant, and the EBITDA is translated at the average exchange rate. The net debt is translated at the closing spot rate. If there's a dislocation between those 2 rates, you can get a temporary mismatch in the covenant. If the new spot rate, that is the result at the end of the reporting period, becomes the new average, it washes itself out in the future average debt that comes into that number. And there's a second covenant, which is the EBITDA interest cover, which is less susceptible to, I suppose, an exchange rate movement compared to the first one. In order to be prudent, we were concerned about the impacts of the Moody's rating on the 27th of March and what the impacts would be on the rand-dollar exchange rate, and engage with our funders to build in a level of flexibility within those covenant ratios. And we have managed to get the banking partners in our revolving credit facility to relax the covenants from a net debt-to-EBITDA from a maximum of 3.0x to 3.5x the March measurement period, and the EBITDA interest cover from a minimum of 4x to 3.25x. Now the proceeds from the disposals will clearly go to reduced future interest costs, and those will not have yet benefited the income statement with the proceeds having been received late in the reporting period. In terms of the foreign exchange movements that the group is managing in the period, the rand, if you haven't look in the table that we published, on average it's been 4% weaker than the comparative period for the prior year. And the spot has been close to ZAR 15.66 on the 29th of March. And we've seen significant weakening post that date. So these tables, we have got a note below it, so I indicate that due to weakening post this date, there will be further financial consequences as a consequence of that further weakening. It will benefit the translation of foreign operations with the dollar-denominated earnings, and it will have an adverse effect on the translation of dollar-denominated debt at the reporting date. The naira has been very constant during the period with no major movements. There has been a significant devaluation in the average exchange rate of the kwanza, where that has weakened by 53.9% in the period and 31.6% from the closing spot rate at the end of September 2019. Clearly, there's been a significant move in the average rates for the Zimbabwe dollar, where those have moved from ZAR 2.54 -- or ZWL 2.54 to ZWL 16.54, and that has moved from ZWL 15.20 to ZWL 17.96 compared to September 2019. In terms of the capital expenditure program, the capital expenditure program remains tightly controlled. As we've demonstrated in the last couple of years, we have put a tight control over the capital expenditure. Historically, we've had around about 2/3 of that being replacement capital expenditure. The balance or the 1/3 being expansionary. We have given guidance of between ZAR 600 million and ZAR 700 million just moving into -- as a range, but we will be tightening that range for the rest of the financial year, and we'll not be approving any further projects. And to the extent that we can conserve further cash in the period, we'll be doing that. Erik, over to you for the outlook.

Yes. I think, overall, if we go through the outlook, clearly, the -- it's very difficult to determine what is going to happen over the next couple of months in terms of demand. I think the whole world has got huge uncertainty around how long this is going to last, how deep the recession will be and how long it will take for consumer demand to return. And I want to be very careful to use the term return to normal. I think we'll probably -- we might see a different level of normal, but it's clearly going to be very disruptive over the next couple of months. And thereafter, I think all of us will be in a very different place. But we are going to use this as an opportunity, I always say, according to the -- a well-known phrase, "Don't waste a good crisis." That is clearly what our management team is going to do. We're going to make sure that we cut costs wherever possible, I think not just because we want to do, I think we will be forced to do so. And of course, thereafter, we will be very careful to relax those control measures as the economy normalizes on the other side. But clearly, a tough time. Glenn mentioned the level for CapEx. I want to put it on the table that even those levels, a very significant portion of that CapEx was the conversion of the line in Angola. So overall, almost half of that amount relates to the conversion of the line in Angola, where the picture, of course, now has changed dramatically. But the reason I'm mentioning that is, if you do any forecast going forward, clearly, we're going to have massive focus on reducing CapEx. And for next year onwards, I think that number is going to be significantly lower. So clearly, we're going to have a massive focus on reservation of cash, whether that's for the next couple of months or the next period. And I think once things normalize thereafter, we will again look at how we expand into -- how we look at different opportunities. Clearly, we feel we have a very good footprint in Africa right now despite the fact that, at the moment, conditions are severely constrained. And hence, once we normalize, we have enough cash again, we have brought our debt under control, et cetera, I think when we start looking at expansion again, it is likely that we will look outside of the continent of Africa. Clearly, before, we've been constrained in terms of our technical agreements that limited us to trade for our beverage can and food operations in Africa, but we do not have that constraint anymore. And hence, once things normalize, we will probably look at opportunities in different parts of the market. I think that concludes sort of our summary of our trading updates. So we are now going to allow for questions.

[Operator Instructions] The first question we have is from Munira Kharva from Nedbank.

So I got a few questions from my side. The [ Slide 12 ] is on the relaxation of the covenants. So just to understand that outside of that, is there any other holidays that the bank is granting you guys?

Munira, there's not. I would expect to receive the proceeds tomorrow. It's such a material number within our forecasting that one has factored these things into the equation on a prudent basis. There are no other relaxations.

Okay, okay. I see. And then on the SA Bevcans, how much of your guys' volumes is alcohol?

Munira, if I talk top of my head, I would -- and it's a rough guess, I think it's about half.

Half, okay. And are you seeing a slowdown in the CSD market as early in SA? Or is it just too early to tell?

I think it's too early to tell. Keep in mind, the packs that we sell are generally what's termed immediate consumption packs. So I think it is fair to assume that very few people will go out planning to buy beverage cans unless it's for pantry stacking. So a lot of your immediate consumption demand, in the short-term or during the lockdown, would be significantly reduced.

So you won't be running your lines for -- you're going to reduce the capacity that you're running in those facility there?

That's correct. So at the moment, both our factories has got lines running. Clearly, for our Rosslyn line, that has got a very significant portion of its volume that's going to the alcoholic market. There's only one line running at the moment. And in Springs, we are only running product for our CSD and energy customers.

So are you guys planning on touching any staff? I mean like...

Sorry, just explain what you mean with that question?

So I mean in terms of cost-cutting, you mentioned cost-cutting, is that linked to the labor force? Would you be planning on laying off workers?

Okay. So there are 2 parts to that question. So the first one, we've already reduced in Springs, where you've got 3 lines. As we discussed during our year-end, we were looking at reducing the crewing from 3 crews -- or to crew 3 lines, we will reduce that, so there's only crewing for 2 lines, and then we will flex that labor between the 3 lines as and when the demand requires. So then in terms of COVID, I think that will all depend on demand. Clearly, it will depend on how long this is going to carry on. At the moment, the policy we've implemented is that any workers that are working, clearly, they get their normal pay. Any of the workers, and more so office staff that can't work, that is working from home, that's very normal. But anybody else is, at the moment, on leave. And we will allow people to go into negative leave to a certain extent. But thereafter, once their leave runs out, unfortunately, they will be on unpaid leave. We will, of course, also look at measures. First of all, depending on the impact you see how many people is on unpaid leave, whether there's assistance we can give them. But at the same time, we will probably also have to look at our salary levels, and we will keep on adjusting that if need be after consultation with the relevant parties.

Okay. And then maybe just 2 more questions on Africa. Is there any talk of any lockdown for Angola and Nigeria?

Yes. So in Angola, there's not a lockdown at the moment. In Nigeria, they have already announced yesterday. I think it was yesterday, a lockdown in the Ogun State, and that's where our beverage can factory is. So at this stage, we can still run, but -- and it's unclear what the exact rules of the lockdown is going to be, but we will probably still be able to supply our customers. In the Lagos State, they have something, they don't call it the lockdown, they -- I think it's like a slowdown or something, which has got some restrictions, but businesses can still run. So -- and the same for Zimbabwe, has just announced a 21-day lockdown as well. And interestingly enough, if you look at the regulations issued by government, they are almost identical to what was issued in South Africa, so the conditions would be very similar. And as a result, most of our business, in fact, as far as I know, all of them in Zimbabwe, can keep on running. But clearly, it will have an impact on demand.

Sure. Okay. Then the last question is on the liquidity. You mentioned that you've seen Nigeria tighten up, maybe if you can explain on that end. Give us your view on -- so when I look at what the full -- what the forward rate curve is pricing in for naira, it's around [ ZAR 500 ]. What do you guys think about that? And Glenn, for you, would there be a need to account for this as hyperinflationary?

Okay. Before we get into the accounting, and you're going to upset Glenn heavily if you talk hyperinflation. This is -- I think something everybody is still trying to get to terms to. I think we mold off that from the moment, but I'll allow Glenn to respond to that. So let's talk first about Nigeria. So clearly, the -- with the devaluation, or not the devaluation, the reduction in the oil price, clearly, there's going to be significant pressure on the reserves from Nigeria. They'll probably go into a fairly sizable current account deficit. And I think, therefore, it is expected that the currency will go up. The question is not so much, what it's going to do to the exchange rates, but more so what it's going to do to liquidity. Clearly, we still have a very decent volume of cans we're supplying there. And the question is going to be, how do we prevent a similar situation than what we had a couple of years ago, where the liquidity required us to fund the business from offshore? I think the difference this time around is that the currency is not pegged anymore, so the market rate should or the normal demand -- supply and demand should set market rates. At the same time, I don't think it is entirely a floating currency. We have already started seeing some tightening of the availability of dollars. And we're going to have to manage that very closely going forward. But clearly, we want to avoid a situation where we have to fund that from our offshore balance sheet. And we -- if need be, we will cut back production. Because what we fund is to keep on running at the full pace when you've got the liquidity crunch. Eventually, the currency devalues and whatever profits you've made almost evaporate through currency devaluations. So we -- if liquidity is severely constrained, we will also cut back on the levels of production. Now the next one is then, what about Angola? Now clearly, that's the one where we had the biggest trading income to protect before and the highest volume, and therefore, the biggest requirement for ForEx, which we had to fund from offshore. I think, first of all, at the moment, our operation in Angola has got -- first of all, because of the declining volumes, they sit on very healthy stock of raw materials. We don't believe we need to buy any raw materials through the rest of the year to keep them going at current levels. So there will be virtually no requirement to fund the business in Angola at all. We -- given the fact that they are now operating at near breakeven levels, if we need to stop it for a period of time, we'll even do so. Although, as I indicated, there's definitely not a need to do that for, well, definitely not until the end of our year-end.

But do you expect that business to go into losses? I mean so because the situation's deteriorating now? And -- yes, I mean is that the expectation?

I don't want to speculate too much about where volumes are going to go. It is quite volatile. So I don't want to go into that too much. What I can say, our team on the ground, they have been extremely proactive and has cut that cost significantly. And at the moment, even at very low volumes, we reduced our fixed overhead dramatically. We had to lay off a number of people, so we run at a -- a skeleton staff at the moment. So we are quite confident that we'll be able to protect that business as much as possible. Glenn's off the -- I'm going to allow Glenn to respond to the currency question.

Munira, just in terms of hyperinflation. To qualify for hyperinflation, we've got to have a cumulative inflation rate over a 3-year period of 100% or more. And I don't think it's near that. And the functional currency in Angola is actually dollar. So the goods are actually priced in dollars. And so we wouldn't find ourselves in a hyperinflationary environment there.

The next question we have is from James Twyman from Prescient. The next question we have is from Anthony Geard from Investec.

If I can just ask for some clarity. What actually happens if the covenants are breached? And so that's my first question. The second one is on your liquidity risk management, in the notes to your annual accounts, in note 6.1, you talk about various liquid resources, which total almost ZAR 6 billion and extend over the next 3 to 4 years. Can you explain how these liquid facilities that you are able to draw on, how they work? And how you would be able to access them? And what the terms or constraints are around those?

Anthony, technically, in terms of IFRS, if the computation of the covenant comes out at more than the predefined levels, one would have to disclose the long-term portion of any funding as short-term because it could technically be a breach of the covenant. The banks would effectively have the right to call their money early under a breached situation. I mean that is one of the reasons, because of the volatility in the exchange rate, we early engaged with our funding partners to manage that particular risk. In terms of liquid facilities, essentially, we negotiated a revolving credit facility agreement with a consortium of banks. That is -- the utilization, which is linked to the funding that we've secured. And then within that, you've got to manage the covenants. So we've got access to that amount of money as long as one is able to produce sufficient EBITDA just to cover both the legs of the covenants in the agreement. To the extent that -- sorry, on the EBITDA, obviously, your ability to draw on that excess portion is limited.

Okay. So just to be very clear, you cannot draw on those liquidity facilities if you breach covenant?

Yes. Or if you're drawing on those facilities, it would not be supported by the covenant result and covenant calculation. So you need to utilize the funds to produce EBITDA. Basically, that's the message.

Sure. And just one final question. Just to be clear, you've got a payment of -- the capital repayment of, is it $115 million in May of this year?

Yes. Essentially, what we've done there, as part of that revolving credit facility, we created a, what we call, facility E as an earmarked, dedicated, totally reserved facility for that repayment of $100 million. So we would fund $100 million out of that particular facility and $15 million from the proceeds that we disclosed. So that is available facilities to repay that position on that date.

The next question we have is from Brent from Renaissance Capital.

Three quick questions from my side, if I can. I'll throw them all at you at the same time, if it's okay. So just in case I missed it, can you just explain or just clarify the relaxation of the debt covenants for the first half? Do the debt covenants, do they resort back to their previous values for the full year? Or did they remain at the relaxed levels at the interim stage? That's my first question. Second question, transformation is correct. Isle of Man has shut [indiscernible]. And just give a clarity [indiscernible] of you guys. And do you guys see that as potential risk in the short term if you can't source material, particularly for the Bevcan operations? And then just my last question, specifically on Angola. If my understanding is correct, one of the issues in Angola was that as the kwanza devalued, you guys, in turn, roll that over to your customers, and effectively, the pricing became more onerous? Can you maybe just have a -- well, just provide a little bit of detail just in terms of how you guys are looking at pricing in Angola in order to reinject some demand into your products?

Thanks, Brent. So I think the relaxation of the covenant, I'm quickly going to leave to Glenn.

All right. From a covenant relaxation point of view, generally, what the banks do in abnormal situations like this, they relax the covenant for the immediate measurement period, and they will revert back to the normal levels, where the net debt to EBITDA would be set at 3x as opposed to the relaxed position of 3.5x. And the EBITDA interest cover would go to a minimum of 4x as opposed to the relaxed 3.25x. The -- with the significant proceeds that we're getting in from the disposal, there will be quite a significant impact favorably on the debt. We will manage it accordingly, and obviously manage capital expenditure and working capital in the second half will be critical.

Brent, you asked a question about Isle of Man, but the -- sorry, your line just went dead there. Can you maybe just repeat the Isle of Man question?

Sorry, I'm not quite sure if my source of information is correct, but my understanding is that Isle of Man is shut down during this period or some of their facilities. I just want to get clarity of where you guys are getting sufficient raw material for the Bevcan operation.

Okay. So at the moment, remember, we have quite healthy stocks of raw materials. And as it stands right now, because we're not running all our facilities at the moment because of the non-supply of alcohol products, that means whatever raw materials we plan to consume during the next 3 months -- or sorry, the next 3 weeks, we will only consume half of it. So despite the normal safety stock we have in the system, our consumption will also go down. And therefore, the demand on Isle of Man has dropped dramatically. So I'm quite sure they looked at what they have on their floor as well as the revised demand forecast that we've given them, and I think it's the right thing for them to shut if they have done so. Obviously, they will also look to conserve cash as much as possible. But Isle of Man has always been very responsible. And if there's any supply issues, they would have let us know. And so far, we haven't heard anything for us to be worried about. They assured us they can supply, so I'm not, at this stage, concerned about it. Your next question related to the devaluation of the Angolan currency and how does it impact on pricing. So clearly, a U.S. dollar price is wonderful to protect your price. But in the end, what is more important is whether consumers can actually pay that price and whether your demand is going to remain intact. So in Angola, after the significant devaluation, we did take -- we had a look at the price. So we did pass through quite a significant price increase to our customers to stimulate demand. We've also taken a part of that decrease and put it into a marketing fund to market cans in the country, and we are busy with quite an extensive marketing campaign in Angola to stimulate demand and assist customers in their own marketing activities. But clearly, it did result in a reduced margin. Does that answer your question, Brent?

Yes.

[Operator Instructions] We have a follow-up question from Munira.

Sorry, guys, I forgot to ask one thing, the debt. So I noticed that you guys have chosen to prioritize paying down local currency debt over USD debt. Glenn, you made a comment about the rand being undervalued or -- how do you arrive at that conclusion? And do you feel it's in the best interest of the company to go that route?

What we -- it's a very good question. I mean what we've watched over time is that where there's risk from emerging markets, the rand takes a beating quite significantly. And then as market -- as life settles down a little bit, it tends to come back a bit. One doesn't quite know what the impacts of COVID on emerging markets is in the long term. My point of view that I'm trying to get across is that to buy dollars with that lump sum all at once with a weakened exchange rate I don't think would be prudent. We would first look to settle the rand debt. It still has given us the capacity to settle the dollar-denominated debt, so it remains our very clear intention to derisk the balance sheet further. But I think possibly, over time, the currency might settle a little bit as opposed to the peaks of just after Moody's announcement of a downgrade.

Munira, if I can just add to that. Obviously, we consulted quite wide with our banking partners and advisers. And the general view is that it would be unwise to settle significant U.S. dollar debt at the current rand dollar rate. As Glenn pointed out, normally, there's an overreaction to the panic, and the rand gets -- goes to a spike. There is an expectation that that will come back. If not, we do not -- if we're wrong, we don't expect that it will devalue significantly from where it is right now. Clearly, after the downgrade on Friday, which we expected, there's been some level of reaction. But we do believe that, in the short term, it will come back. And hence, at that point in time, we will have the opportunity to settle U.S. dollar-denominated debt. But at the moment, we are trying to keep that -- those funds available, and we don't want to crystallize that position or that loss right now. But clearly, if that remains, then we'll have to relook at it.

Next question we have is from Kgosi Rahube from Citi.

Can you hear me?

Yes, we can hear you.

Sorry. Just three quick questions from my side. I think the first question, I just want to understand the magnitude of potential FX losses. Obviously, in the context of the devaluation in Zimbabwe, that's typically very difficult to forecast such numbers. So if you can just maybe give us an indication there. That's my first question. And number two, how big are the restructuring costs within the DivFood that you expect to come through in FY '20? And then lastly, with regards to your debt covenants, I'm trying to understand how come your debt is not ring-fenced? I mean you, obviously, got U.S. dollar-denominated debt and also you've got local debt.

Okay. I think, first of all, Glenn, do you want to respond to the potential size of FX losses?

Yes. To the extent that they are in Zimbabwe dollar-denominated liabilities, external to the group, we would have to account for foreign exchange losses in those numbers. And those will -- we'll compute those at the end of tomorrow, and we'll report on those at the final closeout. The Angolan position, there will be certain monetary items that have also had to be translated in those positions, so we'll actually talk to those as well at that point in time. The translation will depend on whatever the closing rate is at the end of tomorrow, being the last, obviously, the closing date for our half year. And whatever the cash positions are in that period, there may be positions where we've been able to externalize certain cash between positions, and we will then -- whatever the closing net position is and translate there. So the valuations are primarily, at this point in time, probably sitting in 2 jurisdictions, and that would be Bevcan Angola and in Zimbabwe. The naira has remained pretty constant.

The next question we have is from Shaun Bruyns from Mazi Asset Management.

Just two questions on covenants, if I may. So you renegotiated up to 3.5 temporarily. But when you get back to the 3 years, does the 3 stay there for the duration? Or is there a step-down in the covenant going forward? In other words, do you have to grow your EBITDA over the duration of the gearing that you've got on balance sheet? And then just the second question, and you did allude to it. I mean you basically have to translate your balance sheet at spot and EBITDA at the average. I mean I know this is unusual set of circumstances. But I mean it just strikes me that there must be a better way of striking a covenant where you don't have the currency mismatch.

Yes. Okay, if I can answer that. The covenant is measured at 2 particular closing points in time. So the first is the 31st of March, and the other one is at 30th of September every year. So in between those periods, one utilizes [indiscernible] to manage working capital and fund transactions for the [indiscernible] of those 2 points. So it will go from the 3.5x back down to 3x. We did obtain a relaxation in the covenant at September 2019 and didn't need it at that time. So I think it's just [indiscernible] applying our financial management, and so it depends on what that closing spot rate is. If I say in a [indiscernible] our former President [indiscernible] our Finance Minister, Tito Mboweni, over a very short space of time, it went up about ZAR 3. [indiscernible] got a high [indiscernible] on the dollar-denominated debt. And why we negotiate these relaxations is just to build into the calculation in the kind of sudden external shock that could happen in the numbers. So there won't be a phase [indiscernible] it goes down to that point. And if the circumstances are such at the end of the September period, where there is an issue, we've got good relationships with [ managing ] partners, we will discuss with the managing partners the situation that face us at that point in time. But I think one must recognize that a ZAR 2 billion inflow or thereabout is going to make a significant improvement to the debt profile.

So I get that. But I'm talking -- so I understand for this financial year. But over the next 3 years, there isn't a step-down to get to, say, 2 or 2.5x. It remains at 3.

It remains at 3, yes. And then just in terms of the way the covenants negotiated, I mean we have had many, many discussions in whether we should be having the income statement and balance sheet translated at average rates. I mean typically, the banks stand firm, and this is across 7 banks in the consortium that they want the debt at spot. So it is what it is, and we have to manage accordingly. And the point to make is that if that spot rate becomes the new average, so let's assume ZAR 18 becomes the new exchange rate, the dollar-denominated earnings stream within the [indiscernible] results will be [indiscernible] that higher. But it's a bit of a [indiscernible] in similar that one just has to be practical about it.

And Glenn, just last one before I go. The functional currency of the Nigerian business, is that dollar or is that naira?

It is dollar. Again, the pricing mechanisms are all set on dollars.

[Operator Instructions] The next question we have is...

Sorry, can I just respond to one more question. We failed to answer Brent's last question. He asked -- let me just see -- in fact, sorry, it was Kgosi asked whether -- what's the size of the restructuring cost in Divfood? That's going to be quite a sizable number, probably in the order of ZAR 50 million for the first half of the year and potentially a similar amount for the second half, although the second one is still very uncertain. It will depend on the level of restructuring.

Yes. This is actually exactly right. And then Erik, I don't think we answered Kgosi's about the debt covenants and the ring-fencing. Just to advise everybody, we have 2 treasuries, one that runs the South African operations and one that runs the offshore operations. And the procurements and treasury business is located in Isle of Man. It's got a separate dollar-denominated facility, and that's why there are 2 facilities, and they're not co-mingled. Essentially, what we'll be looking to do, and we've got a particular pretty efficient structure to do it, is utilize the Glass proceeds to reduce some of the drawdown on those dollars at the time.

The next question we have is from Kwame Antwi from KOA Capital.

I've got two quick questions. The first one, back on the debt again. Naturally, you're going to receive a substantial inflow from your sale of assets. But if we see a marked decline in your EBITDA, which looks like the case, particularly 6 months out, you probably will be reaching the covenant again at 3x. Is there any long-term plan to deal with these -- your debt level? Or you intend to trade yourself out of the problem? The second question I've also got is on leases. So a few years back, you did your sale and leaseback agreement. In terms of the new accounting standards, IFRS 16, if I remember correctly, leases will now have to be capitalized. Will the corresponding liability that comes along with the capitalization of leases be included in your debt for covenant calculations? Or will that be separate?

All right. Just in terms of the debt, let's just do the second one. It's easier. You are right, it's IFRS 16. We have specifically spoke that out of the RCF Agreement with the banks so that does not qualify as interest-bearing debt in terms of the covenant calculation, so there's no impact in terms of the covenant. In terms of the potential decline in EBITDA, I think Erik and I are looking at all the forecasts with the operation, the various scenario plans. We are -- I think if you step back and look internally, Nampak is pretty well capitalized from a fixed asset point of view, property plant and equipment. And there are no really major long-term big capital items that we need to spend. So I think, internally, one can turn off the taps quite strongly on the property plant and equipment expenditure and hone in even more tightly on working capital. Now the combination of those 2, we expect to result in a further release of cash that will be used to manage any potential pressure on an EBITDA number.

Okay. I've got one last question. On the pension liability, I think on your balance sheet date, the last one, you had about ZAR 900 million. And you said the ZAR 500 million has disappeared or has left with your -- the sale of the U.K. plastics business. Where does the additional ZAR 400 million or the balance, ZAR 400 million or pension liability, where does that come from?

Kwame, the number at the end of last year was ZAR 924 million, and that relates to the postretirement medical aid liability for South Africa only. Because the liability is at Nampak Plastics Europe were shown that part of it as far as a discontinued operation. That pension fund liability was sitting in liabilities held for sale, so out of the system as that business is closed out of the numbers in March this year. So I think that taken almost the liability of ZAR 1.5 billion down to around ZAR 924 million. And I think a further benefit is that the 1/3 component of that liability that was exposed to the potential weakening in the rand versus the pound is no longer a risk in the group balance sheet.

The next question we have is from [ Jonathan Gary ].

Just quickly. Obviously, you can see where the share price is trading at the ZAR 120 level. When do you -- where do you believe -- or when would you believe that the company would be reinstating dividends, in the foreseeable future, perhaps?

Jonathan, no, I don't think it's going to be short term. I think we're on a very different space right now. So as we mentioned before, I think our medium-term objectives has remained the same, as we said at year-end. First of all, we want to pay off dollar debt. Thereafter, we might want to consider a share buyback, especially at these levels, thereafter resume a dividend. But clearly, at the moment, while there is still the risk of the covenant hanging over our head, we will definitely first want to gear down the balance sheet, make sure that our funders are comfortable where we are, and only thereafter, will we look at resuming the dividend. So I think under current circumstances, I think our dividend is still quite some distance off. I think short-term paydown debt, thereafter, look at a share buyback if we have the cash.

I think just to add to that, we've considered -- and I think we've been asked by many shareholders and analysts if there would be a one-off special dividend. We have not thought that to be a prudent approach. We'd rather -- if we went returning capital to shareholders and look at a sustainable benefit to the share price and doing a share buyback at these levels because that will manage the denominator in the share price going forward as opposed to a one-off payment that has the share trading [indiscernible] immediately gets paid if we've got extra.

The next question we have is from Boipelo Rabothata from Investec.

Can you hear me?

Yes, we can.

Just one question from me, and it's with regards to your contract that's coming to an end next year with AB InBev. Are you still confident that you'll retain most of that contract?

So yes. To -- just to clarify, so that contract where we have 100% of the AB InBev volume comes to an end at the end of March next year. We are already in discussions with AB InBev, and I can't comment on the progress on there. But clearly, we are confident that we should retain most of that volume. I think it's highly unlikely we will retain all of it, in other words, 100%. And quite frankly, I don't think we necessarily want to retain 100%. I think it will be good for some volume to be going to our competitors. But at the same time, that will fill up their lines with volumes where it is some of the lowest prices in the market. I'm not convinced that our competitors necessarily want to fill up their lines with those volumes. Does that answer the question?

It does.

The final question we have is from [ Mbasa ] from Mazi Asset Management.

Just one question for me on clarification of the covenant, just with regards to the cash that gets included in the calculation of the covenant. So within Angola and if there are any conditions in Nigeria, should anything change?

All right. In terms of the cash that's included, the cash in Nigeria is included, and there are no conditions in the covenant related to Nigeria. There are conditions where cash in Zimbabwe is excluded, and there are -- there's a formula that -- it comes into play for Angola. But I think if you have a look at the table that we've produced and we've consistently demonstrated to the market, I think we've seen very, very good cash extraction out of the Angolan market, and the cash balances are down at pretty low levels. And as we indicated earlier on, there's a significant portion, we still got bonds. With that hedging program has proved very, very beneficial over the period. And it seems, [indiscernible] on that basis we do. So there's no adjustment for Nigeria at all.

[Operator Instructions] The next question we have is from Chris Logan from Opportune.

Yes. Obviously, very tough times. With that in mind, historically, Nampak being well-known to pay top dollar in terms of employee costs, so much so that often you sell a business, I mean to someone else and they take it over, reduce employee costs, and it becomes very unprofitable. Are you addressing your employee cost issue? And I'm not just talking about in terms of the head count reduction but in terms of no increases or decreases because this has been a long-term problem. That's the first question, if I may.

So Chris, thanks for that question. So yes, we are looking at that. Of course, that includes -- there's a requirement for consultation. But all those options are being looked at the moment.

Okay. That's good news. And then just on the CapEx, sorry, the line broke up a couple of times. But did I hear you correctly that you're not going to proceed with that second line in Nigeria? And then I think I heard you say that your future CapEx will be outside of Africa when it does occur. Did I get that right?

Chris, first of all, let's talk about the Nigerian line. So the Nigerian line, as we said, we managed to increase the throughput on that line to allow us to do up to 1 billion cans, which means there's still quite a bit of headroom on that line. So clearly, once we get to full utilization, we will not immediately put in a second line. And, let me give you an example. So for instance, let's say we get to a point where we sell 1 billion cans at full utilization. At 1.1 billion cans, I think it's still too early to put in the second line given the fact that our competitor there has got 2 lines already. And because if you put in the second line, that line -- well, the utilization would be so low that I don't think it would make sense. So we will hold off until there's reasonable utilization of a second line before we put another line in there. And the simple reason we want to do that given where the African economies are at the moment, I think it would give us a better return for the related risk if we actually rather invest in a facility elsewhere in the world. So we haven't taken a decision like that. At the moment, there is nothing specific. But I think, in principle, we say that our investments in Africa, we are probably over invested there right now. And therefore, we would like to spread our risk base by also looking at other parts of the world where you have other much bigger market, for example, beverage cans. And therefore, the risk of investment might be lower, although it will probably also be at lower margins.

Low trading margins. But I mean I think you -- am I right? If you look at the net margin after all the ForEx losses and impairments and everything, that trading margin is a bit of a pie in the sky margin.

Chris, as we pointed out before, our trading margin is specifically the margin that relates to trading in country. And as we defined in our financial statement, that excludes any losses that are abnormal to the trading. So it's not just abnormal in terms of the occurrence but also whether it's material in terms of the size or in terms of the nature. So there are multiple things that qualify a loss as abnormal. But you're absolutely right. When we look at the net margin on these returns, we do not only look at trading income. That's only one of the measures we look at. We obviously take into account all the losses, including foreign devaluation losses. And on that basis, yes, it might be that the -- with the lower risk in some of the other parts in the world, the net margin might not necessarily be low. It might even be higher.

Yes, exactly. And you seem to be moving in that line. Good luck with those moves.

Thanks a million.

The next question we have is [indiscernible] from Investec Asset Management.

Can you hear me?

Yes. We can hear you now.

[indiscernible] here from Investec Asset Management on Ninety One. So I have a question on Nigeria, just as a follow-up. There was a line, sort of second-hand line that was acquired that was aimed for the DivFood opportunity in Nigeria. How far are you in implementing that line? Or have you -- are you sort of taking a break from that opportunity? And then secondly, are there any major set of contracts, either on DivFood or Bevcan, that are coming up for renegotiation in the next 12 to 24 months that you can please run us through?

So the first question, the line that was acquired for the opportunity in Nigeria. So that project is currently on hold. So at the moment, there was limited capital spend on that. But a big portion of that, the cost of that project will obviously be to move it to Nigeria and put it in there. At the moment, we've taken the view to put that project on hold. We're not going to spend any further cash at the moment on it. We're going to wait and first see what developments are in Nigeria. But at the moment, we're not going to spend any further cash on that project, and it is on hold. Then in terms of any other major contract that's coming up, I think the biggest contract we have at the moment, as we discussed, the Bevcan contract with AB InBev coming up next year. But in the meantime, there are multiple other contracts coming up. That's a regular occurrence. Some of these contracts are annual. We, for instance, have, in Nigeria, also a contract with AB InBev coming up, in fact, in 2 days' time. So that's clearly already been negotiated. We can't give the details of that through yet. But in all these contracts, I think you can expect all the normal negotiations -- the outcome will depend on the availability of spare capacity in the market, whether people are full or not. So it will be competitive. Where there's spare capacity, generally, you will find margins to come under pressure. But at the same time, sometimes, we will win volume. And sometimes, we will lose. I think that's quite normal. And as we said in South Africa, with the amount of spare capacity there, we've always said we will have further margin -- or sorry, not margin necessarily, market share loss. But there's a bottom limit to that. And at the moment, we find that for our competitors, it is getting significantly more difficult to take volume away from us. So yes, that's, I think, all we can say at this point in time.

And then just maybe before I give the line to others, are you able to give us any indication of capacity utilization in Nigeria given you have obviously debottlenecked your operations there, and equally, maybe just some idea of the capacity utilization in Angola, please?

Okay. So in rough numbers, I think you can say in Nigeria, we're now roughly at probably just north of 70%. So there's quite a bit of headroom that we still have available. In Angola, it is extremely low. So obviously, we have 2 lines. Both those lines are capable of producing up to 1 billion cans, although there are more sizes in that country. So we've also at the time of converting the existing steel line to aluminum, we've given it some other size capability. But right now, I would be getting. But -- if you look at the combined capacity of those 2 lines, we're probably sitting on about a 20% utilization, so it's extremely low. And as you can imagine, the steel line that we're converting, we have stopped that project largely because of the COVID pandemic. But there's no reason to rush that project. So for all practical purposes, we've got one line permanently shut at the moment. We've removed the labor from it. And even if we need a second line in the short term, we can run it with a crew from one line. But at the moment, volumes are extremely low.

Sir, that was our final question. Would you like to make any closing comments?

Yes. I think thanks for all those questions. Clearly, it's an extremely challenging period that we go through. But at the same time, we've already factored all these things into our forecast model, so we've got a very good idea what the pressures on the business is going to be. I think we have a clear idea of what the funding requirements are going to be. We're, obviously, having discussion with our funders, and I think we've had very good conversations with them. They've been very supportive during this whole process. But clearly, in the end, we need to make sure that we're going to make the business work. As I said, at the same time, this is a crisis, but let's not waste a good crisis. So we're going to try and make sure we use this opportunity to cut as deep as possible into our cost base. We will address, I think, permanently some of our cost aspects that are structural in nature. And we're going to make sure that we reserve cash in the short term to get through this crisis. We do not know how deep this is going to go. But at the moment, I think we've got a very focused management team. And sadly -- in a lot of the areas of our business, we are doing much better at the moment. I said before that we thought we were exiting the perfect storm. We were just dealing with some of the aftermath of that storm. It looks like the entire world is in a new storm, so let's stay away from terms like perfect storm. But yes, thanks for the support. Thanks for very good questions. And yes, we're certainly going to make sure that we get through all of this. But I think in all your own businesses, at the same time, I get you're going to be dealing with very similar issues, and we would like to wish all of you the best of luck in dealing with it.

Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.