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 event is being recorded. I'd now like to hand the conference over to the Chief Executive Officer, Mr. Erik Smuts. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen. Thank you for joining us this morning. Welcome to Nampak's investor call where we will discuss the market update that we've released earlier this morning. Just to confirm, this was a voluntary trading update for the 11 months ending 31st of August 2021. I think it's fair to say that, in general, trading conditions improved as COVID-19 restrictions were eased in South Africa and most of the markets where we operate in the rest of Africa. This resulted in significantly improved group operating results, and group revenue for the period increasing by more than 20%. I want to point out that this statement should not be read as a profit warning. At this early stage, we do not have adequate certainty yet to give any accurate guidance on profit ranges. We are, however, pleased to report that trading profits and margins grew as a result of successfully restructuring initiatives and our focus to reduce operating costs and the simplification of our business. I'm going to start with the Metals divisions. So in Bevcan SA, we benefited from export volumes and the recovery of the local market despite alcohol bans and restrictions still being in place for sporting events. In Bevcan Nigeria, we continue to experience double-digit volume growth while demand in Bevcan Angola remain subdued. The big, good news story is the return of DivFood South Africa to profitability after the successful implementation of [ Project LEGO ] and despite lagging fish can demand, while demand in DivFood Nigeria remained strong. In our Plastics segment, Rigids South Africa increased volume on the back of increased home consumption of certain staples, while milk bottle demand was limited due to general milk shortage. The volumes of our Cartons business showed a pleasing recovery with good improvements in profitability. Moving on to our Paper business, which is mostly outside of South Africa, they benefited from the easing of restrictions and good growth of customer requirements, mostly in Zambia. In general, we were not restricted by the availability of foreign exchange in both Angola and Nigeria. But it's got to be noted that in Nigeria, we had to buy dollars at rates higher than the official rate, which did negatively affect profitability. In terms of our disposal process, we are very happy to report that we have successfully concluded an agreement for the sale of Nampak Tubes. But unfortunately, we have not concluded any of the other disposals to date as the process is taking longer than originally anticipated. We can confirm, though, that we are still actively busy with this process and hope to update the market on these asset disposals at a later date. For an update on the renegotiation of our funding agreements, I'm going to hand over to Glenn Fullerton, our Chief Financial Officer. Over to you, Glenn.

Thank you, Erik. Good morning to everybody. I'd like to also just touch on the covenant compliance. We have -- as previously reported, we have complied with all quarterly covenants to date within the adjusted limits that we set. And furthermore, the covenants were within the original limits of less than or equal 3x for net debt to EBITDA and greater than or equal to 4x for EBITDA interest cover the last reported quarter ended 30th of June 2021. In terms of renegotiation of the funding agreements, the group's funders required an interest-bearing debt to be reduced by ZAR 1 billion by September 2021, and that was through a strategic sale of assets with a combination of asset disposals and a capital raise. We have held ongoing negotiations with the lenders, and certain of those terms have been revised in light of our improved trading conditions year-to-date. After considering the group's results for the 11 months ended 30th of June 2021, the milestone date for the assessment of the group's ability to reduce the debt by ZAR 1 billion has been deferred until the 30th of June 2022. The restriction to reduce debt through asset disposals and/or the capital raise has now been relaxed so as to allow the utilization of cash flows generated from normal operating activities. And that would also include the receipt of money from the Reserve Bank of Zimbabwe that we can use to apply towards that ZAR 1 billion debt reduction. To the extent that we repay those debt facilities, there will be a cancellation of the available banking facilities commensurate with that debt repayment. The lenders have also agreed to a relaxation of the net debt-to-EBITDA covenant to 3.5x from the 30th of September 2021 through to the end of 30th of September 2022. Thereafter, the covenant on a net debt-to-EBITDA basis will reduce to 3x, commencing 1st of October 2022. Erik, back to you.

So thanks, Glenn. I think that concludes the update. So we're now going to give an opportunity for questions.

[Operator Instructions] The first question comes from Rowan Goeller of Chronux Research.

Just in general, we've seen supply chain issues around the world. Can you give us a bit of an update on any supply chain challenges you're having in the various geographies that you operate in, please?

Thank you, Rowan. Yes, so I think there's a number of supply chain constraints that we are talking about. The first, of course, were during the strikes in June -- or not the strike, the unrest. We battled to get raw materials from the ports and, of course, finished goods to the ports for exports. What we do find around the world, though, is that there's definitely a huge constraint at the moment in terms of containers available for shipping. And we do experience problems to get particularly steel out of China at the moment. So we haven't run out of steel for all our products. We certainly had shortages for short periods of time, but we are seeing a very tight market on the commodity side. But certainly shipping around the world is, at the moment, coming at a premium and our containers are in shortage of supply.

And if I may, a second question. Some of your competitors have had challenges in both food cans and beverage cans. What are you seeing from your bigger customers now in deciding on who especially to procure from to guarantee supply -- to guarantee good supply coming through? Are you seeing a little bit of recovery of market share in some of those areas, particularly in the Bevcan area, please, the Bevcan sector?

Rowan, I don't want to get into the specific issues of customer volumes at the moment. I think it's still too early to report on those. But certainly, the market has taken note of the issues experienced by some of our competitors. And of course, we would -- we are in discussions with potential customers, too, and those negotiations, I want to call it, are ongoing at the moment.

The next question comes from [ Kobis Suliers ] of All Weather Capital.

Can you hear me?

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Hello? Can you hear me?

No, I can't hear anything.

[ Kobis ], can you hear me?

I can hear you. Can you...

We can hear you now. Please go ahead and ask your question.

I just wanted to ask one specific question about the export contracts that you -- that was also mentioned in the trading update. Erik, I believe you mentioned in the half year report that these export contracts were going to run off eventually. I just wanted to get the time line on that. Is it still expected to run off at the end of the year? Or how is that progressing?

Thank you, [ Kobis ]. I think as we reported during the previous discussion, those export contracts coming to end at the end of our financial year, so those are now concluded. It's only some of the exports out of Angola that will still happen in the next couple of months.

And the next question comes from Brent Madel of Absa.

Yes. If I can just ask sort of 3 questions all in one on the Metals business. Just first of all on Bevcan, is a -- I mean, obviously, we've had a bit of a roller coaster ride with regards to COVID restrictions. Can you give us any idea at what levels we bounced back at? Are we pretty much back to normal levels, i.e., pre-COVID? My second question on Bevcan Nigeria. I mean that market still looks incredibly robust for you. Just a sense of whether that's driven by strong demand or whether you are still retaining some market share? And then lastly, as far as Bevcan Angola is concerned, just your thoughts on the next step there. It's a market which has been struggling a bit for you. Is it still just a wait-out until sort of COVID restrictions come -- or the release of COVID restrictions come back to you? Or do you think, strategically, you need to make a decision there?

Thank you, Brent. So first of all, on the volume growth for Bevcan South Africa, I can't give you a number yet. We will obviously give more details during our results presentation but later in the year. But I think it is fair to say that volumes grew quite substantially locally as the markets eased up. I know, yes, we did have the restrictions in terms of alcohol bans. But as previously reported, we have not seen a huge impact from that. The biggest impact, I think, was more from the restriction on sporting events, et cetera. And that recovery, of course, we have not seen yet. In terms of Nigeria, I think it's beyond just market share growth, but the overall market seems to be very buoyant in terms of beverage cans. So yes, I think the overall market there is growing. Like we're also saying in our update, we also had strong demand from our DivFood business in Nigeria. So the overall market there where we operate appears to be quite strong. In Angola, I think it's a matter of wait it out. So yes, the economy is going through a particular patch as a result of the drop in the oil price previously. But of course, now with oil price very strong, you should see more liquidity coming back into the market. I think we should expect an uptick in the overall economy. But the -- I think a very significant issue there at the moment, as previously reported, is the fact that the export market or the cross-border trade into the DRC is not open yet. The border is still closed for trading between these 2 countries, and that is normally where we see a huge volume or a big volume from our cans are going into the DRC. That has not opened up yet in the moment that happened. We should see an immediate uptick in volumes. But overall, profitability in that market has been ahead of expectation, mostly as a result of cost savings. But to get back, I don't think it's the point where we make a call on that yet. It's a big market. We've got a very big investment in there with 2 lines, in which it's very good operationally, well-run, low-cost [ market ]. So I think it's wait and see. But at the moment, like I say, it is washing its face in terms of not, I want to say sucking up liquidity. We are still getting cash out of it. It's generating cash. It's profit positive. So definitely not the point where we want to pull out of that yet. But of course, we keep on monitoring it on a continuous basis.

And if I can just have a follow-up question, just on your last point. So you mentioned cost savings. Can you provide some -- just further details just in the last financial year, even in the second half of the year, what you have to implement to reduce the cost just to manage that top line?

Brent, there's a number of things. I mean the one is simply the number of people that we have to run the line. And as we reported previously, we reduced the number of people on these lines significantly when the volume dropped. So wherever we can reduce fixed costs, we've taken that out of the business. Every single, in that case, kwanza that we have has been turned out a number of times before we spend it. So I think it's generally people are very cost conscious and they do understand that the business is in survival mode there. So yes, overall, very happy with the cost control measures. But that's mostly related to variable costs like, for instance, the number of people running the lines but also fixed cost reductions that we implemented in terms of fixed labor complement.

[Operator Instructions] The next question comes from Nhlakanipho Mncwabe of 36ONE Asset Management.

I just got 3 questions. The first question is I just wanted to gain maybe, if you like, a reminder of what the agreements with the Reserve Bank of Zimbabwe was. I see you got $4 million out of Zimbabwe now. Just want to understand [ the update ] in line with the initial agreement. That's my first question. Then the second question is just to clarify your earlier comment was that you're getting cash out of Nigeria at higher rates. And I see on the updated sales that cash transfers are constrained out of Nigeria. I just want to clarify, is it that you're getting cash out just not at the official rate? Or is it the other way -- the other one? And then just lastly, could you maybe just talk us through, now that you have more flexibility on how to reduce that ZAR 1 billion debt, just your thinking as to how you're going to get to that ZAR 1 billion target from the funders.

Okay. So first of all, in terms of Zimbabwe, the original amount, remember, it's about $67 million. And we had an agreement with the Reserve Bank to pay that off over a 3-year period through quarterly payments of plus/minus $5.6 million per quarter. Now they have defaulted on that at the end of March when the payment should have resumed or should have started, and we then reached an agreement with them where they will pay us $1 million per month. Now that did start a little bit late, but that is the agreement that we have at the moment, and that agreement will remain in place until they have finalized the Blocked Funds Framework, which is a process that's going through the Zimbabwean Parliament at the moment. We have no idea when that would be concluded. But at the moment, we are being paid $1 million per month. And as a result of that, we have received $4 million, as you mentioned, to date. Once the framework is concluded, the question is what happens then? Well, we will then form part of the blocked frame -- Blocked Funds Framework, and we will have to see what that means for the balance of the amount due. But so far, they've been pretty much on time for the payments to date. They have missed a payment here and there. We had to remind them and they have followed it up thereof. But yes, so that's your first question on Zimbabwe.

Erik, can I just add one thing to this, please? You can't -- just remember that we have provided an expected credit loss ratio of 85% on that. If you work out the $1 million per month, so the $3 million per quarter as a percentage of the $5.6 million that was contracted quarterly, it's a 54% kind of payment rate that is happening. So we've got an 85% provision against it. So we've been quite conservative on that basis, and we'll reassess that in the preparation of the accounts for September.

Correct. Thanks, Glenn. Just remind me, sorry, what was your second question?

Nigeria, I just wanted to...

Okay. So rate in Nigeria, yes. So overall, we managed to get all the dollars we were looking for in Nigeria, but that did come at a higher cost. So we're not constrained in terms of our trading. But I have to say it's difficult to get the dollars. And as a result, we did have to pay a premium to get those dollars.

Sure. And my last question -- yes. So my last question was just on the reduction of the ZAR 1 billion in -- just how are you thinking about that now that you've got more flexibility.

Okay. So I think a key issue is, as Glenn pointed out before, we could only -- the only cash that was going to count towards the ZAR 1 billion was either asset disposal or a capital raise. That has now been lifted to take into account any cash that we generate through our normal operating activities, in other words, our normal profitability from our income statement, et cetera, and of course the money from the Reserve Bank of Zimbabwe. So in fact, they basically lifted all the restrictions on where we can find, and we are considering a number of assets at the moment. I can't give more details on that at the moment. We, as mentioned, we are still in the process of disposing these. We are engaging with a number of potential buyers at the moment. So that process is ongoing. Yes, we did not conclude the deals as quickly as we were hoping for. But we are still hopeful that we can make significant progress to that. And of course, we will update you the moment we do have more details.

[Operator Instructions] The next question comes from Niall Brown of Flagship Asset Management.

Just want to find out, you were paying these excess interest rates or ratchet interest rates. I think you referred to them as -- do those still apply with any of your debt at the moment?

Glenn, do you want to respond to that?

Sure. Niall, that's part of the renegotiation. It's obviously taken into account different levels of net debt to interest -- net debt to EBITDA. And there are different structures within the new facility that will take into account different interest rates. There will be a slightly higher interest rate for the flexibility to go up to 3.5x net debt to EBITDA. And what we've done there is we've intentionally requested a slight elevation in the past level of 3x, just to cater for seasonality and/or timing differences during the month. So what we will be doing is canceling certain of the excess headroom where we've been paying commitment fees, and that will be offset, that cost, against elevated interest charges. But the ratchet interest costs that were being applied up to 3x will be applied from a lower level. You'll get more detail on that when we publish the final result.

Maybe just to confirm, the ratchet interest rates would only apply based on the level of the covenant achievement. So if we, for instance, above 3 -- up to 3.5 would have a certain rate if we -- below 3, it would have a different rate. So the level of ratchet interest rates being applicable will depend on the actual achievement of the covenant at every quarterly measurement period.

Yes, exactly. [ Thanks, Erik ].

The next question comes from [ Nick Krisher ] of Signal Asset Management.

I've got 2 questions. One on the milk market. Can you just talk about the dynamics in the milk market and how you are positioned to take market share there? And my second question is on the export market. I might have this wrong, but was it -- I understand there where shortages around the world -- can shortages around the world, is that what drove those exports? And were you able to get really good prices on those cans because the desperate buyers who are short of cans, they'll pay anything for it? And has that shortage now resolved itself? Those are my 2 questions.

Okay. Thank you, Nick. I think, first of all, on the milk market and our ability to compete there, I think we are in a very strong position where we have implants with some of our customers. So typically, in that industry, with a lot of the dairies, we typically have a manufacturing -- a small manufacturing setup inside of the dairy itself where the bottles are blown. And of course, those are long-term contracts and the customer has automatically locked in for the period of that investment. So there, of course, we will be in a very strong position to defend those markets. In terms of the export of cans, as we reported previously, that is only a temporary sort of opportunity, and it was as a result of shortages in the rest of the world. A lot of that was as a result of the COVID pandemic and increased home consumption. But the bigger trend is actually the move away from single-use plastics towards more sustainable aluminum packaging, and that trend is still continuing. Now of course, the local suppliers in those markets and those that -- both Europe and North America, they are in the process of installing additional capacity. And a lot of that capacity is now busy coming online. So it's unlikely that we will export further volumes into those markets in the short term. But as we have previously also reported that we did also gain export contracts for the export of can ends that will still extend into the new year. So the exportation of canned bodies, that is basically coming to an end now. Of course, if further shortages sort of happen, we do have the tooling, we can react on a -- in a very short period of time. But for the moment, I think that opportunity is over. Does that answer the question?

Yes. Just on the milk market. I mean I have seen some [ subset ] of the use of plastic in the milk market, and there might be some questions about that. And my question was more along those lines, whether we will continue to be using plastic in the milk market or maybe there will be a switching into alternatives?

Well, we, of course, do have very good alternatives in our cartons market. And so we are already supplying a lot of cartons into the dairy market. And you might recall some of the products on our packs in, for instance, [ core ]. And our joint venture with Elopak will also allow us to expand and grow further in the aseptic market. So there's still a lot of opportunity. If you look at the market that at the moment is basically dominated by some of the big international competitors, we've got very little market share on the UHT side of the market. And with some of the new products that we will bring to the market through our joint venture with Elopak, we do believe there's enormous opportunity for growth on that side where those type of packaging is competing directly with plastic that is, of course, now under pressure from a sustainability point of view.

[Operator Instructions] The next question comes from Rajay Ambekar of Excelsia Capital.

Just a question on price increases. With the underlying commodity prices moving up and we've heard from some of the food producers, et cetera, about the price increases they are facing, can you just talk about where you are in sort of that pricing in that heavy -- what have you put through over the last, I guess, 6 months or so? But what do you think you still have to do to sort of recover underlying costs?

Rajay, I've got to be very careful when I start mentioning price increases and so on. But what I can say is generally in the market, the commodity prices are fully recovered in the price. Of course, when you see a cycle like we have seen recently where there's enormous price increases that forces you to react quicker because of the size of it. So generally, in some industries, the price is reconciled monthly, like, for instance, in the bottled beverage side, where in some of the other products where we sell -- markets we sell into, for instance, on the food can side or some of the plastic side, there are quarterly price adjustments. But when you see these massive price increases, you do not always have the luxury to wait the quarter out. And where we needed to do that, of course, we have engaged with customers to make sure that the impact of those increases are recovered in the market to the extent possible.

All right. And maybe then just a question on tax share in SA and maybe Nigeria is the 2 biggest markets. Maybe just talk a little bit about sort of cans versus glass and a little bit, I guess, against plastic. But I'm just kind of thinking about, I guess, environmental issues, but also pricing issues with aluminum going up in there, has it negatively affected sort of the dynamic between glass and cans. How do you see that maybe playing out?

I think it's fair to say that aluminum is at a -- not an all-time high, but approaching $3,000 a tonne. It's definitely significantly higher than where it used to be sort of the last couple of years, and it did put pressure on price. But at the moment, it seems to be outweighed by the overall trend towards sustainable packaging. So in South Africa, there is -- as a direct result of some of the restrictions during the COVID period, where some of the glassmakers were not allowed to produce any bottles for the alcohol industry, so that created a glass shortage in South Africa. And at the time, it was estimated that, that would take up to 18 months to get that shortage out of the market. So the beverage can industry is certainly still benefiting from that overall shortage in glass. And we've definitely seen that in our beverage can operation, they benefited from those volumes. And we've seen very strong demand, particularly from the alcohol sector. Then what was the other one, Nigeria. There, to get accurate tax share information is very difficult. So we don't have accurate information to measure how cans are stacking up at the moment against glass or PET, yes. But overall, we do know that in some of those commodities, they did also experience shortages of packaging much earlier in the year. I have not heard of anything more recent. But the demand is still strong. And yes, we're still basically selling every can we can make in Nigeria.

All right. And maybe just last one. Just with regard to the -- and sorry if I missed this if you have spoken to it. But the sale of the business in sort of the Durban area, and I forget the name now. But with...

Mobeni.

Mobeni, correct, yes. With the kind of rights and the disruption that obviously had an impact on that process, but maybe can you comment specifically where -- how that process is going.

Yes. I can't give you too much detail other than saying that the -- yes, I mean, we did experience problems in the finalization of that transaction and we did have to reengage with potential buyers. Unfortunately, I can't give you more information at this point in time other than saying that it's still a very active disposal process.

[Operator Instructions] The next question comes from Paul Sundelson Sanderson of Visio.

First, well done on a much improved operating performance as well as a really successful negotiations around the debt. So well done there. Just can you walk us through when and how the measurement of the new covenants are going to take place? And then also just the fall-off in exports, how that looks in terms of a pickup in local demand. So just those 2 questions.

Paul, let's start with the covenant side, and I'm going to ask Glenn to respond to that question.

Paul, the covenants will continue to be reported monthly to the lenders, but measured quarterly. We had very good interactions with our lenders, they've been very [ supportive of us ] in the process. And instead of this declining trend that we had in the covenants for last year, we had started at 5.25x, and then it's been working its way down, and the net debt to EBITDA was 3x. We have agreed that the lenders for that to be set at a flat level of 3.5x for the period ended September 2021, all the way through to September 2022. And that really just gives the business a little breathing space for timing differences or -- on receipts from customers, because sometimes you can get paid 1 day after the period end where it can change the numbers, and there are also seasonal trends within the numbers. So I think that is a prudent approach from both Nampak and the lenders, and that will just be measured quarterly and reported quarterly.

Is that the average for the month? Or is it at a point in time just on the [indiscernible]?

It's a point in time, so that closing -- so we will compute it at the end of each month and we will submit a document to the lenders, and it will be measured on a quarterly basis at a point in time at the end of each month -- each quarter.

Okay. Great. And then just on the export side, just drop off in exports and pickup in local demand, just how you see that transpiring.

Paul, I think we've been quite fortunate. As we mentioned before, these exports came at a very opportune time when we had this massive drop off locally. But as we've seen the export demand, I want to say, tapering often and disappearing now, we've seen -- we did see a strong pickup in local demand, especially for bigger packs. And therefore, at the moment, the demand for beverage cans is strong. So obviously, there's a big volume of cans that we have to replace for this coming period. But at the moment, demand is strong. And therefore, we're quite confident that we should be able to fill that gap.

Gentlemen, we have no further questions on the lines. I will hand over back for closing comments.

Thank you very much. So Glenn, is there any final comments you want to make before I close off?

Erik, I think thank you to Paul for your acknowledgment. I think it's been a very good recovery. We've stuck to all the plans that we had given to the lenders. We've achieved all those milestones throughout the period. We are into the year-end reporting. And I think we've achieved what we've set out to do. And thank you for that.

Thanks, Glenn. So maybe from my side, I want to start with the bit that we have not achieved, and we wanted to own up to that prominently in the update. And that's the fact that we could not sell all the businesses as per the original timelines. So -- and I think that's clear there. But I think you should also see that the banks have taken cognizance of the improvement in our trading results. And I must say, I'm very pleased about some of the initiatives that we managed to pull off. We have a very complicated process, a [ Project LEGO ] that we executed in the food operation, and it's been very successful. And you can see the volumes coming through. Of course, there's a lot of opportunities out there at the moment. There is -- I don't want to get into all the issues around incidents in the market with some of our competitors, but that's certainly opening up opportunities for us for -- to regain some lost business going forward. But in general, I'm very pleased that the simplification process of our business is busy paying dividends. We haven't got through the simplification of our portfolio yet as we reported. But we keep on working on that. And of course, if the optimization of some of these divisions are going better than expected and there's no need to dispose of specific businesses, we'll keep on reevaluating those, and that's certainly happening. Some of the businesses where we were in trouble before, as mentioned, we managed to reduce the cost. The optimization is working. And therefore, we reconsider those. But that's an ongoing assessment of the portfolio. At the moment, we -- like I say, we're very pleased, first of all, how the market has improved generally. But we -- I think we're in a good position to regain the trust of the market. If I look at our share price to where it was this time last year, and at one stage it was trading well below ZAR 0.60, it's now sort of well north of ZAR 3. It's almost 5, 6x the price of what it used to be. That tells me the trust from the market has improved. I don't think we're out of the woods yet. There's certainly a lot of work to be done. And hopefully, by the time we publish our results, we can give you more clarity on what we have achieved to date. But certainly, for the team, there's still a lot of work ahead. We -- like I said, we're not out of the woods. But it's also rebuilding the trust from our customer base. Some of the volumes we lost historically, one had to argue at the time when new competitors came into South Africa, that maybe our customers felt that they're not getting a good overall deal from Nampak. And of course, that considers a lot more things than just price. Maybe they didn't value the services we provide in terms of quality or our research and development operations. But in the last year, as we reported, we managed to extend a lot of long-term -- some long-term contracts. We've regained market share. And I would like to believe that we have built trust with our customers sometimes through what we've done, sometimes what happened at our customers. And hopefully, that's giving our customers the opportunity to assess the value that Nampak is bringing to the market maybe a bit more accurately and maybe value us for what we can really bring to the market in terms of consistency of supply, quality, peace of mind, et cetera. So I think we're in a good space, but lots of work still ahead. We are actively still attacking our cost base. We do still believe our cost base is still too high, and we're doing everything in our -- within our sort of power to control that. But overall, thanks for everybody that's attended this call. We appreciate your interest in the business. And hopefully, we can keep on holding the trust with the investor community as well. Thank you very much.

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