Nampak Limited (NPK) Earnings Call Transcript & Summary

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

Thank you very much. And first of all, ladies and gentlemen, thank you very much for joining us this afternoon for our pre-closed trading update. I'm going to start by giving you a quick summary of the document that I'm sure you've all seen. And thereafter, Glenn will give you a bit more detail on the financial side. So maybe to start off with, I think we all understand that this has been a particularly difficult year globally. And I think, of course, Nampak has not been spared the impact of COVID. So overall, I think it's fair to say it was a year characterized by weak economic climate and pressure on consumers' disposable income during the first half of the year, and then this was exacerbated by an even more challenging second half due to COVID. I think we all know this was related to the lockdowns that we experienced in most of the territories we operate. There was the ban on alcohol sales that obviously had quite a big impact on our overall demand. And of course, the restrictions on social events that impacted on people's ability to socialize and enjoy some of the packaging or the products for which our packaging is used. All of these impacted negatively on overall volumes, and it is expected that this will reduce our profit for the year. Our trading levels are slightly busy recovering, and in some markets, of course, faster than others. I think on the bright side, there's quite a number of things to look at. First of all, significant progress was made in reducing our U.S. dollar debt, defending our market share and also developing new growth opportunities. Some of the details of these include, first of all, the renewal of some substantial supply contracts. And let me start with South Africa, where we've managed to renegotiate the extension on a -- of a multi-national customer, where we've secured an allocation of 85% for the next 3 years. So this will really make a big difference in assisting us to defend our market share in South Africa going forward. Then in Nigeria, we've also secured another 3-year agreement. This is also an extension, where before we had an allocation of around 50%, and based on various factors, we managed to secure 100% of this customer's volume. And this will -- that should enable us to actually grow our market share in Nigeria, so definitely something that we are very pleased with. Then I think almost even a bigger thing to mention is we've managed to secure some very substantial export contracts for the next year, with potential demand in excess of 800 million additional can bodies. Now maybe just to explain that, 800 million cans is almost the equivalent of taking one of our existing production lines and fully utilize that for the whole year. So if you consider that in South Africa we've got 5 production lines, then you can imagine the impact of taking one of those and fully dedicating it to export volumes for a full year. So it's something that we are very excited about. Then we're also in the process of developing some new growth opportunities. And the first one is through a new joint venture that we've concluded with Elopak of Norway, and this is for the supply of gable top cartons for both the fresh and aseptic beverage markets in Sub-Saharan Africa. So this will obviously not only focus on South Africa but specifically in the whole Sub-Saharan African market, where I think it will give us a substantial benefit going forward. Then we've also made significant progress in the restructuring of both our Plastics and Divfood operations in order to make them much more profitable going forward. And lastly, as committed, we have successfully managed to reduce our dollar-denominated debt, but I will leave it to Glenn to give you more details on the financial overview. And yes, Glenn, over to you for the financial side.

Good afternoon to everybody, and good morning to those in foreign countries and west of us. It's certainly been a challenging period and that, I think, has shown the resilience of Nampak. And we've been impacted by COVID at a profitability level. It impacted cash generation. And consequently, our covenants have had to be renegotiated. The COVID effects have been significant. And on top of that, we've had a significant slowdown in Angola. And those are really the 2 major reasons for the covenant renegotiation. If we had not had those particular impacts, we had committed to disposing of 3 particular assets: the former Glass business, the Cartons business in Nigeria and Nampak Plastics Europe. We had achieved all of those, and the proceeds that we've received from those disposals would have certainly put the group in a good position. The effects of the pullback in the profitability have impacted the EBITDA levels. And consequently, one has had to have a relook at the covenant levels. On an operational basis, I think the group has made good strides in addressing its cost base. There have been salary sacrifices by the staff and the main Board, including the nonexecutive directors. We've assisted cash generation through, I think, very swift action in adjusting our working capital levels to new demand levels. And that is certainly going to assist and complement the cash generation for the period. We've certainly focused on addressing the mix of our rand and dollar-denominated debt as we committed to. We have repaid $100 million worth of dollar-denominated debt. We converted ZAR 1.4 billion, which was the proceeds from the disposal of the Glass asset, and into $84 million. The Reserve Bank approval reduced that foreign debt by $84 million. We complemented that by a further $16 million from the disposal of the Cartons Nigerian business. So that brought the total reduction in the dollar-denominated debt to $100 million. Pleasingly, gross debt is reduced by 21%, and we are slowly reducing the mix of the dollar debt within the total component that has come down from 75% down to 65%. Each of the period has been relatively volatile rand-dollar exchange rates. There is a slight improvement on the March position, but it certainly has been volatile during the period. The group remains very well-funded. Certain facilities are clearly not usable because of the limitation linked to the COVID impact on EBITDA. We have also, as part of the review of the facilities, rightsized the size of the banking facility. When the facility was put in place in September 2018, there was a particular transaction that was being contemplated that we no longer require. And therefore, the facilities have been rightsized to exclude that. We've also addressed the mix between the rand-dollar, and we still remain very well-funded and with significant headroom in our covenants. The covenants have been relaxed for 2 periods, and effectively will be measured on a quarterly basis. But we've got a relaxation of those covenants to essentially the 31st of March 2021. And if I can just remind you that those covenant positions are measured on a rolling 12-month EBITDA position relative to the debt and also relative to the interest cost. And it will take some time for the lagging effect of COVID fall outside of that calculation. And therefore, we've needed a headroom put into those covenants until that point in time. The focus for the period has be on margin improvement and cost reduction, very clear focus on cash generation and working capital management, the tight control of CapEx. We've adopted a very conservative approach, and we've managed it in a good way. We will come in below our initial expectations, and the CapEx guidance remains. We are committed to reducing the group's debt and strengthening the group's balance sheet. We will be exploring the sale of certain assets with a focus on reducing gearing and also to complement that position, strongly managing our working capital and capital expenditure and improving our operating performance. We've had very good cash transfers during the period from our Angolan and Nigerian geographies with a total of ZAR 2.2 billion transferred in the period, ZAR 1 billion from Angola and ZAR 1.2 billion from Nigeria. There are moderate cash levels left in those countries, which are used to finance the working capital. In Angola, we have 75% of that cash balance hedged. There's no economic hedge available within the Nigerian economy. The covenants we've set out in the SENS announcements, and you can see that there's been some detailed thoughts that's gone into that. As the business comes out of the COVID period and produces expected operating profits and EBITDA, the covenants will trend back towards the originally contracted levels of 3x net debt-to-EBITDA and 4x EBITDA interest covenant. The foreign exchange movements. In the period, there's been certain volatility in all the exchange rates, so overall, a weaker position in the rand on average. The kwanza has been the big feature where that has weakened by 60%. There's been a relatively stable naira. Very material devaluation in the Zimbabwe currency, where that's devalued by greater than 440%. But one would need to understand when you convert back to the rand-dollar exchange rate, one -- we take into account the devaluation, but we also have to apply the hyperinflation accounting principles through this. We're in the process of doing those accounting calculations for the year-end, and the hyperinflation effect will compensate for the devaluation of the currency. Capital expenditure guidance, as I indicated, will be between ZAR 600 million and ZAR 675 million, which is in line with what we indicated at the interim, and in fact, slightly lower. I hope that gives you a good overall perspective of the funding and the big strides forward on reducing the dollar-denominated debt.

Thank you, Glenn. So I think just to close it off, I think let's quickly talk about the way forward. I think as Glenn pointed out, CapEx has been very well controlled during the current year. But for the next 2 years, we believe that we can CapEx -- or we can keep CapEx to below ZAR 350 million per year. As we pointed out, we currently have a very well-capitalized asset base, and hence, we don't see any need for massive CapExes in our core businesses. Then we also mentioned that a portfolio review of assets will give consideration to divest from those businesses with either a poor strategic fit or those that are -- that will reduce complexity and, of course, those that are unlikely to provide adequate returns. We will utilize the proceeds to reduce leverage and improve our overall balance sheet. So in summary, as per the quote that we had on our SENS announcement, our short- to medium-term focus is to proactively deleverage and reduce currency and operational risk to the business. We believe that macro environments will continue to be muted, to some extent, for the next 6 to 12 months. But our current strategies will ensure that Nampak will produce much improved results and emerge as a lower risk organization with a stronger balance sheet. Thank you very much, and we will now open the floor for questions.

[Operator Instructions] The first question comes from James Twyman from Prescient.

Yes. I've got a couple of questions. First one, on Nigeria, so just wanted to get some idea of the importance of that new contract. What sort of increase in sales do you think that would give to you? And secondly, on the export business, you talked about 800 million cans. Is that sort of what you'd like it to be? Or is that a contract that you have for 800 million, i.e., have you started the beginnings of something? Or have you reached the end of that?

James, thanks -- thank you very much for those 2 questions. So first of all, in Nigeria, it is one of our biggest customers. So this is a very substantial contract that we have. We unfortunately can't disclose the value of it, et cetera. But in Nigeria, we essentially have 3 or 4 big customers. So this is one of the very big ones. And hence, a move from 50% to 100% is a substantial increase in market share. I think something to point out there is that this contract was in place from the 1st of July. So in July, the customer still had to buy some stock from our competitor that they still had in place. And as a result, we didn't see the uptick on that -- on those volumes in July. But as mentioned in our update, in August, we've already had a record month for August with substantially higher volumes than what we did last year. And then we're not quite close with September yet, but it's already clear that September will be very similar in terms of the margin by which we have beaten last year's volumes. So if you look at the last 2 months, our volumes are substantially up on pre-COVID volumes. Now it's only 2 months, so I don't think we should say that you can just extrapolate that going forward. But I think it's fair to say that the market in Nigeria has recovered a lot quicker than in the rest of the world or the market at least where we operate. And that's been partly because of just the sort of resilience of the can pack in Nigeria, but of course, also on the back of the market share gains that we achieved through this contract. So yes, very, very positive in Nigeria. And then your second question related to the export contracts, in fact, we just started with those contracts. We have supplied the first batch. It has been shipped during September. So we've just started that. The contract that we have for 800 million will -- and we've got to be careful how we word it. So the contract is for -- it's got a minimum volume in, which is not 800 million, it's a little bit less than that. But the indications we got from the customer is that this is -- this could be in excess of 800 million cans. So it's not a fixed number. But essentially, we've just started with that, and that is expected to take us through the next 12 months.

Is it a 1-year -- one-off deal? Or is it something that could continue going forward?

Yes. No, this is a once-off deal at this point in time. Of course, there is the potential to extend that if demand remains and capacities and all those things. But at the moment, it's a once-off contract. And -- but of course, the particular size that the customer wants, the tooling for that, we now have all of that. Therefore, if the opportunity comes up again, it means we already have the tooling for it. And then literally, they can place an order with a phone call where. They have, as you can imagine, to bring new tooling, et cetera, took quite a while. And therefore, there was a lot more preparation work required for this order. But now that we've got it in place, we can react on a very short-term basis. And keeping in mind that they are -- our business is quite seasonal. And depending on whether you're in the Southern Hemisphere or Northern Hemisphere, it either means if we want to export to a customer in the Southern Hemisphere, it will put pressure on our capacity when we are in peak time. However, the consequence -- the opposite, of course, is also true, and therefore, for both Asia, Europe and North America, they have their summer when we have our off-peak or the winter period. And therefore, that it is very complementary to our sort of seasonal trend. And you can read into that sort of what benefit that gives us in terms of picking up, hopefully, some future demand as well.

The next question comes from Munira Kharva from Nedbank.

So I just have 2 questions. The first one is on the asset sales. Which areas of the portfolio are you looking to sell or considering as potential like disposal targets? And then the second question was just around in the local market, what's happening with the competition, the other can manufacturers, are they operating? Are they stagnant? If you can give us any information on that? And maybe just with regards to the market share gains in Nigeria, what drove that win? Was it a pricing thing? Or was it competitive weakness or just some color on that?

Okay. Thanks, Munira. I think the first question, in terms of the type of assets, so I think at this stage, we are considering a whole number of assets. So I think you should look at the trading update in terms of what we are trying to achieve through doing this. Of course, part of it is deleveraging. So as we mentioned, we want to make sure that we bring down the overall balance sheet risk. If you look at the share price performance, et cetera, over the last couple of months, I think it's clear that investors are concerned about the risk contained in our -- both our balance sheet as well as our portfolio. So I think we're going to have a broad look at what we need to do and take a very balanced approach to say what can we do to reduce risk, whether it's operational risk, complexity or even regional risk. So I think we have a strong place -- or plan in place of what we want to do. We're not going to disclose at this point in time exactly which assets, first of all, because it's not being confirmed. And the reason for that is that we need to look at the specific potential buyers for each one of these assets. But I think, as we indicated to the market before, there are certain assets that we don't think fit into our portfolio going forward. And those are the ones where there's a concern around sustainability or complexity. And then the other one, of course, is just the risk profile is too high. So at this point, we're not going to disclose exactly which assets. But I think it's -- like I said, the objective should be very clear. We want to deleverage, but at the same time, we want to improve our -- the business, the sustainability. But really, the focus is to reduce the overall balance sheet risk that we have at the moment. Then your second question is around the competitors in South Africa. This is actually a question I want to stay away from. We don't want to speculate about the situation with our competitors other than saying, listen, they obviously experienced the exact same headwinds that we've experienced in terms of the impact of COVID. And I suspect it was probably even tougher on them. So that's only speculation. We've got no specific information to inform us on that. Of course, there's a whole lot of speculation in the market that we've heard about, but it's certainly not something that I would like to comment on in this call.

Munira, do you have any further questions?

No, no. That's great. And well done on these results.

Thank you very much.

The next question comes from Mark Narramore from Excelsia Capital.

Just 4 questions. Just maybe starting with -- to add to James' point around the exports, can you give us some more detail as to kind of the type of can that is? Is pricing kind of similar to your existing cans in SA? And also just, yes, is there an option to -- is it just the can or the can ends as well? Maybe if you could just give some color on that.

Okay. So first one, unfortunately, we can't tell you where to or who it is because those are confidential in terms of the contract that we agreed to. I can confirm that it is dollar-based pricing, but it is based on existing contract that we have in South Africa. So although it's dollar, it's very similar to the pricing we have at the moment. The other point to maybe point out is that this is only can bodies. It does not include can ends. So it's only the can body.

And then just a second question around Nigeria. With this new recent big contract win, my understanding is you guys have about 1 billion can capacity and this kind of guidance on CapEx coming down. Do you -- are you happy that you don't have to expand in Nigeria? Or is there kind of a -- what are the expansion plans there?

Yes. So as we mentioned before, we think we have still significant headroom from what we had before. So historically, we're operating at levels of, give or take, 70% of that capacity. So there is still a good 30% capacity available to expand. And it's only once there is growth beyond that, that we need to reinvest. I think as we've mentioned in our half year call, we don't have any short-term plans for a further line in Nigeria. Of course, if demand keeps on going up, we can do so very quickly. Our factory in Nigeria has been designed to accommodate 2 production lines, and the footprint for the second one is already there. And therefore, the ability to install a second one, we can react very quickly. But there are no plans at this point in time to do so. I think we first want to see the Nigerian market growing more. So on the back of market share gains, that's one thing. But I think we want to see the whole market growing further before we will make a decision on a second one.

And then maybe just one more for me, so I give the other guys a chance. But regarding kind of the cost-cutting you're guiding towards, is a lot of that in the numbers? Or -- and what kind of incremental cost-cutting can we expect going forward?

I think, first of all, yes, some of that's in the numbers, but not -- so for instance, we've had very successful cost-cutting in our Plastics operation, the same in Divfood and in the Bevcan side. So the Bevcan side, that's already built into the numbers, and we hope to do some more going forward. On the Divfood side, that is a restructuring project that is currently sort of being executed. Most of those savings will only come through next year. In fact, the restructuring will only be completed by June, July next year. So although we expect a substantial change in profitability from Divfood going into next year, the full benefit of the restructuring will only be beyond June, July next year. But we -- despite that, there's very significant turnaround that we expect from -- out of Divfood. And therefore, I think there's 2 things to take into account. As we mentioned in our half year results, there was an amount of ZAR 48 million of restructuring costs built into the first half. We mentioned it would be a very similar amount that you can expect for the second half. And of course, all of that will not repeat itself next year. But then there's -- some of the benefits from Phase 1 that's been completed will come through fully next year. And then the second phase, only a portion of that, it's the after that, that will ramp up. On the Plastics side, they would have been profitable this year had it not been for the impact of COVID-19. So a new, real vigor to our management team, and I think they have done an incredible job to turn around the profitability of that business. And therefore, we should -- hopefully, next year, with the normalized volumes, I think they should be much closer to their true potential.

The next question comes from Todd Jennings from Savanna Tanks.

Yes, I just wanted to ask one quick question -- actually two. Your conference call in March, you have made a mention of the fact that you are looking at expanding outside of Africa and that you now have the ability to do so because of some technical agreements or maybe propriety information [indiscernible]...

I'm sorry, I can't hear the detail of the question. Hello?

Yes, can you hear me now?

Yes, that's a bit better.

I was saying in the March teleconference, you had made mention that you are looking at expanding outside of Africa and that you now have the ability or the release from either some technical agreements or propriety information.

Yes, I understand your question. Yes. Okay. So first of all, what we did say in the -- during that call is that historically, we had a technical agreement with Crown Cork. And in terms of that agreement, we could only operate within Sub-Saharan Africa. That agreement was terminated at the end of last year. And hence, that restriction does not apply anymore. And hence, we can now go and expand into other territories. What we made very clear is with the current level of debt on our balance sheet, we don't think that would be the right thing to do. And therefore, we committed to say we will first deleverage the business, get the gearing completely under control, and it's only thereafter that we will consider expanding into these other territories. At the moment, we believe there's too much risk still on our balance sheet. And we first want to make sure we address those concerns before we start expanding into new territories.

From a fundamental point of view, not a technical point of view, but from a fundamental point of view, how valuable is that put option, if I can put it that way, for Nampak?

What put option? Sorry, I'm not clear on which put option you're talking about.

When I talk about the fact that you've been released from that technical restriction, is that putting you in a lot stronger position going forward?

Well, I think -- sorry.

Yes, barring the fact that, like you said, you don't really want to do anything right now, which I understand, but how important is that option now, so to speak?

Well, I think in the short term, the value would be very little until we start executing on that. But the long-term value, I think, is significant in the sense that most of the growth in many -- in specifically metals and beverage cans has happened in the rest of the world, where I think we all know what the situation was on the African continent. So I think, therefore, expanding our reach beyond Africa in the long term has got very good potential. But of course, we can only do so once we have the financial mettle to do so.

Final question. I know -- well, everybody's commented that maybe going into Africa was a bad idea. You haven't had the rate of return that you really wanted. Cost of entry into the business is a lot more difficult because of the African situation, several kind of constraints, if you know what I mean. But do you regret this? Do you regret it in any way?

Yes, I do. So first of all, it did not work out the way we thought it would. That doesn't mean it was bad decisions at the top. But I think with the benefit of hindsight today, we might have taken different decisions. So if you look at both the operations we have in Africa, from an operational point of view and from a project execution, these were extremely good projects and investments. And you might recall that if you look at our share price, our share price, and I can't remember the exact details, that was in the order of, let's say, somewhere between ZAR 13 and ZAR 15. The growth in those territories drove the share price all the way up to in excess of ZAR 40. And we were very profitable in Angola, and we are still very profitable in Nigeria. So -- but of course, with it came significant risk, and the market appeared to be very concerned about the risk that we are carrying not just on our balance sheet as a result of the funds invested in those territories but also from an operational point of view. So that's something we need to take into account. And I think one needs to reevaluate those investments. And hence, I'm saying we'd be more cautious at this stage to expand further into Africa. And hence, why we said in our midyear results that we are not going to expand further into Africa at this point in time until we see the market either growing substantially or the risks come down substantially or -- and, of course, good profitability. So at the moment, yes, Nigeria is still very profitable. Angola, at the moment, we certainly -- we just got to make sure that we don't incur big losses there. The potential is certainly still there for Nigeria. But we have to look at the overall sort of portfolio, the amount of risk that both these investments carry with them and look at them and say, has it been successful? Well, where we stand right now, I think it's fair to say it has not been. And what is the potential going forward? Well, I think, for both, there's still very good potential going forward, but we have to look at the broader picture.

Okay. Would you be -- but would you say that you paid your school fees already when it comes to Nigeria and Angola?

Well, absolutely. So I think it's, like I said, going into these territories and to learn how to operate is tough, and we've done so. And we've demonstrated that we can operate successfully there. And I've said it before, both those operations are the most efficient operations in our beverage can portfolio overall. So we operate at very high efficiencies. We operate at very low spoilage, and hence, operationally, these are very good businesses. Of course, the macroeconomic environment had a dramatic impact with the collapse of the oil price, and that put us a completely different spin on not only the success of those operations but on the fortunes of Nampak. And unfortunately, that was not within our control. So I think it's fair to say, well, could we have foreseen that there's bigger risk in these markets? Absolutely. And hence, we've always operated with much higher margins in those businesses than you would typically have in a developed country and -- or even South Africa. So yes, there is more risk, but hence, the reason why profitability or margin, in general, are much higher. But of course, when you have a complete collapse of economy or the oil price that these economies heavily rely on, it will have its consequences. And therefore, it -- unfortunately, it will show in the results. And given the high sort of percentage of Nampak's overall portfolios that were invested in these oil-dependent territories, I think it's fair to say, I think we were overinvested in those markets and especially given, like I said, their reliance on a single commodity. And hence, to a large extent, that took the sort of control out of our hands in terms of the profitability. But in terms of school fees, I think we've paid it. We know how to operate there. We've demonstrated we can do it. And therefore, the confidence to operate there is very high.

The next question comes from Brent Madel from Renaissance Capital.