Nampak Limited (NPK) Earnings Call Transcript & Summary

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

Thank you very much. Good afternoon, ladies and gentlemen. Welcome again to Nampak's voluntary trading update for the 5 months ending 28th of February 2023. And I think, please note that as it comes to me, the main focus of this pre-closed update was not on any specific financial results. But rather directionally on the underlying trading conditions in the market and of course, other key matters. I've got my intention to give you a item-repeat of what's already written in the announcement. I'm sure you've already read it. So I'll be giving high level commentary on its content and hopefully provide better insight regarding the critical factors at play. Of course, we will also be opening the floor after my feedback for questions. So let me get straight into it. I think at a high -- very high level, the trading conditions, I think, can be summarized as follows: Overall, revenue continue to grow but at a slower rate than before. Our beverage can business showed mixed growth. In Angola, we experienced strong growth, but in Bevcan, South Africa, despite very strong demand for larger can sizes our own mines producing those sizes are already running at full capacity. While in Nigeria, unfortunately, condition has deteriorated, mainly a result of the very high cost of ForEx and the cost of imported goods going as a result and, therefore, impacting on the market. At DivFood, I'm happy to say that our turnaround is definitely gaining momentum operationally, it's going much better, but unfortunately, our customer base is under severe pressure due to reduced customer spending. And I don't think that is necessarily going to change in the short term, but there are some other positives on that side that I'll speak to you a bit later. Revenue declined at both our Plastics and Paper businesses despite the demand for certain categories remaining stock. The reasons were similar to the decline in demand at the food, in other words, the lower consumer spending [ time ] but we're also impacted by electricity and raw material shortages in Zimbabwe as well as the impact of, of course, translating all of Zimbabwe's results at the much weaker closing rates, and you will note that the Zimbabwean dollar has really weakened since the comparative period. And as you know, when you're in the hyperinflationary environment, you do not on like at the average rate, but at the period ending closing rights so that had quite a big impact on not only revenue but our overall results. Besides weaker trading conditions, the most significant impact on our results for the period came from ForEx losses incurred in Nigeria, due to a larger extraction of in-country cash and the increasing gap between the informal and formal market rights. I think that is something that we also discussed in quite a bit of detail during our update at the end of January. I can assure investors that potential measures to address this risk is having our full attention, and we are actively involved in negotiations with customers to find an equitable solution, high-level details of which are included in the announcement. The other significant factor, of course, was a 45% increase in net interest cost and this resulted from higher net debt levels, but also much higher interest rates. And all of this resulted in a small net loss after tax. What is not included in the results yet is the potential impact of impairments. We are providing a very strong signal to investors that very material impairments in both Angola and Nigeria are likely to result from the massive increase in WACC rates due to higher in-country risk premiums. The diesel impairment models are currently being run and will be reviewed by our auditors before the release of our half year results. So as a result, we do not have the final numbers of those impairments yet, but it is fair to say you can do your own calculations based on the sensitivity analysis we disclosed in our previous results. I think when WACC rates increase in these countries by give or take 5% each, you can imagine that it will have a very material impact on our equity base. The various turnaround initiatives at the Food and Plastic SA are definitely gaining momentum, both [ interlinked ], in other words, operationally and through some of the restructuring that we've done but also through a very productive negotiation of trading terms with customers and suppliers. The results of the year-to-date -- sorry, the results of this is unfortunately not showing yet in our results year-to-date, but they are likely to have a very positive impact on results going forward. And of course, we will update the market further, not only during our results -- half year results presentation, but definitely during the process of relaunching the rights offer shortly after the release of our reports. The divestitures from city outlet Kenya, Tanzania and our general metals business in Nigeria, have also gained a lot of traction. As we reported, we can see offers for various assets in these territories. And I'm confident that we will not only stop the bleeding, but also realize up to ZAR 250 million of cash to this progress. So this should be a very positive thing for the group in degearing our balance sheet. We can also confirm that our [ debt ] margins at better restructuring plan. This has been presented to our lenders in support of various debt extension requests. And of course, we are currently in very active negotiations with these lenders regarding various debt extensions. As you know, there's a big chunk of debt due by tomorrow, and we will be updating the market as soon as we have reached an agreement. I have to warn these things always go to the 11th hour, if not the 12th hour. So our team are very actively working on that at the moment, and we believe that we are making very positive progress. We must do reiterate though that the right offer is still the potential element of our restructuring plans and a conversion for the refinancing. The negotiations for this refinancing will be taken over the next couple of months. And I think we hope to provide detailed feedback to the market shortly after the announcement of our half year results or at least during the first half of June. These things do have a tendency to take slightly longer than one anticipates, but of course, it is in the interest of both us and our lenders to conclude this as soon as possible. So that we can relaunch the right offer process. In order to demonstrate the broad commitment for the execution of the restructuring plan, we've appointed a Chief Restructuring Officer and also constituted a restructuring committee to provide both support and oversight to these processes. We're very confident that both the CRO and the newly constituted restructuring committees we will give impetus to the sale of assets and also sort of what take benefit of the improving deals environment. This concludes my comments on the trading update, and I will now open the floor for questions.

[Operator Instructions] The first question comes from Jacobus Cilliers from All Weather Capital.

Just maybe 3 questions from my side. The first one, can you just define the role of the restructuring committee. I just want to understand their role. Then just a second question. On the previously communicated size of the rights issue, there was up to ZAR 1.5 billion communicated. I just want to understand if it's -- that's still the size being considerable or if it's smaller than that? And then do you have any indication of the time line for that?

Okay. Jacobus, the role of the restructuring committee, as we said, is to support the Chief Restructuring Officer. This committee will not limit in any way. The CRO does report directly to the Chairman of the Board, but the committee has been constituted to see what can be done, not only to assist the CRO in the case -- in the execution of his duties but of course also to provide oversight on that. So I think in short, the restructuring committee is there to help the CRO, but you'll note that they also have another function and that is all other restructuring initiatives in the company. In other words, things like cost-saving initiatives, operational improvement plans, so one half of the functions of the committee is there to provide support for the Chief Restructuring Officer and the other half is there to provide support for myself in the turnaround of the various businesses and the cost reduction programs. Okay. That's the first question. The second one was, I think you talked about the size of the rights offer. Yes, we said it's up to ZAR 1.5 billion. We've always said that we would like to reduce that as much as possible through the sale of assets. Now the restructuring plan that has been presented to lenders, I can't comment on the details yet because it's subject to negotiation from the lenders. So I can't commit to any size for the rights offer at this point in time, but to say that I think it is -- yes, that will be announced in due course. We can definitely not commit to any amount at this stage. But yes, I think that's all I can say on the size of the rights offer. And then your last question, if you can maybe just repeat that?

Just on the time line of the rights issue, but maybe if I can just sneak in the -- just a follow-up as well, as Chief Restructuring Officer taken away? Any powers from the CEO or the Board in any way? If you could just clarify that for us, please.

Okay, so first timing and then the power of the CRO. So I think first in timing. So we had to stop the current rights of the process because the -- there are certain time lines that you can't go beyond in terms of doing the extraordinary general meetings after we had to first of June and then cancel the EGM, we will have to reach issue rights offer a circular and sorry, our EGM circular first, so all of that will only commence after we announced our results because we -- in our previous results are also announced that we did not believe you can use them as the basis for doing a rights offer. So you all now have our sort of pressure results, if I can call it that, for the half year, and then we will reissue. So the intention will still be to conclude that process before the end of September. So if you take the normal timelines, if you relaunch this process, let's say, early June-ish, there's a normal time line that flows it means that you will complete the process just the end of August, but definitely before the end of September. In terms of the powers of the CRO, no, he does not limit the power of the Board in any way. He is there to act independently from the Chief Executive in other words, myself. And that's to give the lenders the confidence that we will act on that sort of agreed restructuring plan. So the Chief Restructuring Officer is not meant to limit my authority in any way, but he is there to assist and act independently for myself to give that additional comfort to the lenders. So where I might be more let's say, emotionally attached to some of the assets and the projects that we were involved in, it is meant to give a more objective review to not only the Board, but also to the lenders in order to sell assets and execute on the rights, not just the rights offer both to itself but also the rest of the restructuring plan. I hope that answers the question.

The next question comes from Dumisani Ndlovu from All Weather Capital.

Erik. Just 2 questions from my side. And maybe just on the cost base, can you just give us a bit of some color on what you guys are doing around trimming or reducing this cost base? I mean, how big is the actual opportunity? And then just around working capital relief, I mean, can you guys just if you can, I mean, just give us an indication of potential working capital, further working capital release if it is still possible.

Yes. Dumisani. Just keep in mind, we can't comment on anything outside of what is included in the trading updates. So I can't give you more color or start giving amounts and so on. I think all we can say at this stage is that we are very serious about reducing costs and hence, the formation of the restructuring committee. I think by doing that, we wanted to demonstrate to the market and the lenders, and how serious the Board is taking the whole issue of cost, sort of reducing costs and selling assets, so I think I can only comment that for.

Dumisani, do you have any further questions?

No, just one more perhaps around the debt. I mean, I guess it's -- since Erik, you can define the numbers, maybe you can just give us some sense of direction where things are headed. I mean just until the discussion you are having with your lenders around reducing that dollar that USD-denominated debt. I mean is the kind of, I want to say, not at the end of the tunnel in that discussion and part of your, say, broader discussions in terms of deleveraging, if you can give us a sense of the believe as all with that.

Let me tell you what I can say. First of all, it is in everybody's interest to resolve this in a way that does not destroy value for anybody. So we've got very supportive lenders that are prepared to refinance the group under the right conditions and terms. And of course, there are other players that some that they do not want to form part of the refinancing consortium or the group of lenders. So there are different parties that's got different interest and strategic intent. So part of what we always wanted to do was to simplify and reduce the number of vendors in the group. So that is something we are working towards. As you know, there are certain lenders that at any case they want us. And therefore, there is interesting, let's call it, either credit discussions going on at the moment to see how the different parties will accommodate each other. But I definitely believe that in light at the end of the tunnel, I think the debt advisers have been very complimentary about what they've seen inside the businesses and we have a good business. There are definitely businesses that need improvement. We certainly need to improve the return on capital that we are currently achieving in all our businesses and hence, the formation of restructuring committee. But yes, there's definitely light at the end of the tunnel, we're having tough negotiations. We're having late nights to get things through, but it's definitely light at the end of the tunnel, and that's certainly not a train coming our way. It's the end of the tunnel or that's definitely what the way I see it.

The next question comes from James Twyman from Prescient.

Yes. So I've got 4 questions. The first 2 are in terms of the noncore asset sale that you're talking about, is this something new? Or is this just the process that was underway before because obviously, what was going on before wasn't achieving very much in terms of sales, but is there like a new assets that you're planning to sell? And then the second thing was you talked about the winding down of unprofitable operations flow. And could you just give us some idea of scale? Is this interesting? Or is this very, very small? That was the first 2 questions.

Okay. James, let's talk of those 2 for now, let me answer it, and then we'll give you a chance to ask your other 2 questions. So your first one relates to, is there anything new in the total assets? And I want to say, no, there's nothing new, but the environment in which deals are done is definitely improving. So we have received renewed interest in some of these assets. So we never stopped looking at potential disposals, so we definitely have active processes in play as we speak, and we'll continue to do so. But of course, we've upped the [ managers that are ] available to assist in this process. The CRO, of course, being one of those. So we are quite confident that there's a much better likelihood of success on these. Yes. So that's the first one. Then the [ second one around the ] divestitures or the winding down of businesses. There we referred to -- well, I think the first one is our Crates business that we're definitely getting out of, we mentioned the sale of ZAR 40 million worth of equipment. And I think one can expect there's more secondhand equipment still to be sold from that business. So I think that is not just gaining momentum, I think there's some successes already. The assets referred to the businesses in East Africa and General Metals Nigeria. So General Metals in Nigeria, we are in the process of sort of running down that business or running down inventory. So we're not placing orders for new raw materials. And as we run down and sell the last sort of product from the raw materials we have -- we will then be selling the property because there's a lot of value that is actually in the property itself. And yes, we -- I think we [indiscernible] there as well. We've got a very small business in Ethiopia, as you know, I don't think one likely to realize much value from that. I think that business has not been very active operationally for quite some time. So I think that, that is just part of the simplification program. And then you've got businesses in Tanzania and Kenya. In Tanzania, we've already ceased operations and we are in the process of selling the property. And in Kenya, we are in negotiations about either 1 of 2 things, either sell the business as a going concern or otherwise, again, available property that we can put onto the market. And all of those processes very active, and we are confident that subject to regulatory improvements, et cetera, that we will get to a conclusion of those fairly soon. Is that going to be before year-end? So in Africa, you never know, but at this stage, I think we are making good progress.

Okay. Back to the question, obviously, this is obviously quite a big new development in terms of lots of these assets. It would be useful to have some idea of scale of what these things or where in terms of whether it is actually something for us to be taking interest in or not.

Okay. So maybe just -- I think we mentioned in the update that the divestitures and sale of assets in East Africa, then we believe it's up to ZAR 250 million and maybe even more to be realized from that. The other sales that are, of course, other businesses and nothing is off the list, we've always said any business where we get a reasonable offer, we will consider the sale thereof and that was a commitment which might not only to our lenders, but that is part of the restructuring plan that's been put forward to the lenders.

Okay. So East Africa, can you say this is potentially quite significant.

Well, I mean, I mentioned ZAR 250 million. I mean it's not small money, but we -- I think the other asset sales we hope to achieve much more than that.

Okay. And then my other 2 questions were, firstly, in Nigeria, you've got some big FX losses. There were big FX losses last year, and that was because of the big move in the [ shadow ] exchange rate. and the contracts weren't reacting to that. My understanding is that, that was resolved and that the sharp move in the exchange rate has sort of stopped. So I'm interested to know why the FX losses are quite so big? And then secondly, the debt at the end of last year was ZAR 5.5 billion. You don't mention debt in this. And I just don't know whether that's obviously risen significantly?

So let me start with the FX losses itself. So a lot of it has got to do with timing and let's call it the phasing of the -- to what extent we expected cash at the -- in the first 5 months of last year versus the first 5 months of this year. So we managed to extract less cash in the first half of last year, but -- and this is important, because of the difference between the formal rate and the informal rate being much closer, the cash that we extracted a bigger portion of that landed in, let's call it, South Africa or the Isle of Man, where in the current period, we've extracted more cash from Nigeria, but the amount that finely arrived offshore was a lot less because of the higher losses incurred because of that higher difference or that increased difference between the informal rate and the formal rate. So -- and hence, you've seen this big increase in ForEx losses. And I think we discussed previously in detail how the pricing mechanism with customers work and the negotiations that are currently in progress is to make sure that we reduce the risk of having or incurring losses between the time of invoicing and then a changed rate at the time of receiving it. How do we do it through 2 different mechanisms. The one is to reduce the payment terms itself and the other one is to put in what we term a true-up mechanism to make sure that you reprice at the time of receiving payments. In other words, you invoice at one conversion rate, but if there's then a change in that conversion rate between invoicing or delivering the product and when the customer pays you, there's then a true-up to that latest price. What it does not do, though, is that once you've received the cash, we still have the exposure until we can actually find dollars in the market to get it out. So that is a risk of course we need to manage. That's not something you can pass on to your customer but we are trying to limit the overall exposure, and those are the negotiations that are currently taking place. I hope that clarifies the question.

Thank you, Erik. Yes. Just to conclude on that one, my understanding is that if the exchange rate is relatively stable then the losses you had to take because of the difference in exchange rates, when you take the money out is offset by the fact that you're making an extraordinary high underline -- operating profit in the operations, so the 2 accounts each other out, would that be the case here then?

No, that is the case. So keep in mind that why you account for it. So don't get confused between accounting treatment and the net profitability, so at a, let's call it, at a trading level, you are being compensated in the price for that higher exchange rate when you do invoicing and in future for the true-up, but the loss that you incurred, you still show as a separate line item, and that is the number that we are disclosing here as the ForEx loss.

Yes. I would have thought that, that would mean that you wouldn't be making an overall loss in the business because although you're getting this huge FX loss.

Okay. So in a perfect world, where there is perfect matching of inflows and outflows, et cetera, the 2 will offset each other. But when you are still extracting cash from prior periods, et cetera, there is still that exposure, and that is what had quite an impact in the current period. Going forward, if you can sort of match your inflows and outflows or keep the timing closely correlated, then the net impact of those should be limited. So yes, but -- in the current period, that did not happen. There were still, let's call it, older funds that were expected. And yes, the small timing differences can have quite a significant impact. It could even result in a profit because if you -- if the rate is actually improving, we might invoice at a higher rate. And even after a true-up, if we then can buy dollars at a lower rate, you can benefit from it. But generally, the trend goes the other way. So hence, why we are trying to put all the measures in place to limit the exposure, but we can't eliminate the exposure. I think you had a fourth question as well.

I -- did I? No, yes. No, the other one was just on the debt. You didn't say in...

Yes. So we're not going to comment about the debt levels at that at this point in time that we will comment on in detail for our half year results. But like I say, we -- at this stage, we're not really commenting on specific financial numbers. The only one that we felt we needed to give you very clear guidance was the ForEx losses that's a known position and so on. And then the other one that we also felt was very important because of the potential size that was the potential impairments, although, of course, we don't have the numbers yet.

The next question comes from Karl Gernetzky from News 24.

Yes. Just quickly, if you don't mind explaining what is driving the impairments in Angola and Nigeria, Am I correct in assuming that because of the sharp rise in inflation and interest rates...

Karl. I'm going to ask my Chief Financial Officer, Glenn Fullerton to explain that. It's quite a technical reason, but I think quite straightforward in terms of the numbers and its potential implications. So Glenn, if I can ask you to respond to that question.

Sure. Thank you, Erik. The major reason that's causing it is the increase in the weighted average cost of capital in those jurisdictions, particularly in Nigeria, where that economy has been downgraded twice in the -- since September '22 when we reported last. The weighted average cost of capital in Nigeria has increased from 12.5% in dollar terms at September 2022 to 17.2%. So that's a [ 4.7 ] percentage point move that it's a 38% movement. Now in our financial statements for September 2022 on Pages 48 and 49, we set out tornado graphs that show the implications of movements in different variables when we're valuing those particular assets. And if you go and have a look at those public documents, a 1 percentage point move in the weighted average cost of capital within Nigeria equates to approximately ZAR 200 million move in valuation in that business. So you can do the math yourself on that. And in Angola, it's about ZAR 100 million for every 1 percentage point move in that economy. So it's a relative measure of risk internally in the country. What we do use is the modern website. It's a worldwide accepted input mechanism for determining the weighted average cost of capital. And what we do is apply those to expected future cash flows and compute what the value in use of those businesses are. And then we compare that value in use to the underlying carrying value of the assets in the company, and we compare those 2 numbers and if the value in use is lower than the carrying value that will result in an impairment. In the Nigerian business that is historically had quite a significant amount of goodwill. At September 2022, it was still an unamortized portion of goodwill of around ZAR 1.9 billion and any potential impairment of that goodwill would go against that carrying value and obviously hit the earnings numbers. It would not hit the headline earnings per share numbers because those are added back, but you cannot unimpair a goodwill impairment. Where there's an asset impairment in future and WACC rates drop and cash flows improve and the value of the asset goes up, you can unimpair an asset impairment. So I think it's an important distinction. And I think we have referred to that in the announcement where we separate the goodwill impairment from an asset impairment and there is a material difference as I've just explained.

Thank you, Glenn. I think another factor that's also impacting in particular to the potential impairment in Nigeria, it's what's happening in the market. So fairly recently, they discontinued the old naira notes and they replaced them with newly printed notes. Unfortunately, there's a shortage of those notes in the market that have put really depressed sort of liquidity in the market and as a result, economic activity. So we've seen quite a drop in overall demand in Nigeria. How long that's going to last, we don't know, but I think it's fair to say that the overall trading environment, not only for beverage cans, but in the general economy had deteriorated. So therefore, we had to build in those projections of future -- lower future volumes into our models, and that's got a knock-on effect on the potential fair value -- sorry, not fair value -- well, I guess it results in the fair value in the end a reduced fair value and therefore, a potential higher impairment.

Karl, do you have any further question?

No. That was it.

[Operator Instructions] The next question comes from Michael Gumede from Business Day.

I just have a few questions of clarity. And could you advise what chunk of the debt is due tomorrow that you will be advising in the same statement on? And just to reiterate an earlier question that was asked, are we not creating some sort of confusion of 2 centers of power when we have the CRO directly reporting to the Chair Person.

Thank you, Michael. I'm going to ask Glenn to respond to your first question related to the amount of debt that are due tomorrow, and he will also comment on what was due on the 20 or is due on the 28th of May. But let me respond to the second part of your question related to the 2 centers of power. So the concept of a Chief Restructuring Officer is not well known or well understood in the South African market. This is a concept that originates from the Chapter 11 sort of situation in the U.S. But in South Africa, it's got a very different meaning. In South Africa, I think it's generally something that has a positive measure to assist in the execution of certain duties. So the separation of power and the independent reporting to the Chairman is there to give the lenders the comfort that the person will act not specifically just in terms of the historic way we've done things, but that we will have a focused approach and let's call it attention span that is directed at the execution of the restructuring plan. So in a way, what it allows the business to do is for the chief executive and his team, the normal executive team, to be released from the complications of doing the restructuring and the refinancing of the balance sheet, but to focus on the management of the company itself. So I think there's a very good reason why you want to separate the operational side of the business and the financial restructuring. So that's the essence of it. It is not meant to create confusion. I think it is meant to provide clarity in terms of who's doing what. Glenn, if you can respond about the question related to the amounts that are due today and the 28th of May, in other words, our short-term obligations.

Thanks, Erik. Michael, that's a good question. In the financial statements, at September 2022 under the note 5.26, we disclosed the short-term liabilities and those included the ZAR 1.35 billion that was due in terms of the rights issue process and that was due -- is due to we settled on the 31st of March 2023, which is tomorrow and that was in line with a rights issue process that had been designed at that point in time to deliver those proceeds. Now clearly there is a process that had to be halted in that regard. So we're in discussions with the lenders to address that repayment date, which would be aligned to a process that addresses the new rights issue process. The second portion that is due is the residual value under the U.S. Private Placement notes. This was 10-year money. It was an original $115 million, which we had paid several years ago. And we have to balance that's due now on the 28th of May 2023 is $55 million and at current exchange rates, is the equivalent of approximately ZAR 1 billion. So those are the 2 amounts that are currently in the short-term category of what's due. We also have to address the debt extension milestones in the current package where those have been extended to the 31st of December 2023, and this is part of the negotiation with the funders to set down an appropriate debt package for the business going forward that will be announced in the market ahead of launching the rights issue.

At this time, we have no further questions. Mr. Smuts, I'd like to hand over to you for closing remarks. Thank you, sir.

Thank you very much. So thanks, everybody, for your attendance. I think in closing, I would like to say that clearly the current trading environment in South Africa is not ideal. I think that, that does not come as a surprise to anybody, consumers are feeling the pressure of higher fuel prices, higher food prices and very high interest rates. So I don't think that is what we should be focusing on despite the fact that it had quite an impact on some of our driving results. More importantly, I think, yes, there will be big impairments coming, but that will not impact cash flow or debt levels. I think that is just narrowing the gap between the current net asset value shown on the balance sheet and where our share price is currently trading at. So I think a lot of that's already been anticipated in the current market cap of the company and should not come as a surprise to any analysts or investors. I think the important bit here is that we are working productively with our lenders to find a solution to put the balance sheet on a more sustainable basis to restructure it, and there are definitely assets that we've identified within the portfolio that we know we can fix and turn around and there's others that we said hang on, let's get out of that, and we are making success on that. So we've got a very clear way forward in terms of the restructuring plan, the Board has shown its commitment to put in the resources to back up that plan. So I think going forward, it's been a long, hard bumpy road for a lot of our investors and shareholders over the last couple of years. And especially since COVID happened, but under improving trading or deal-making environment, we are confident that we can execute on this restructuring plan, and we remain fully committed. Thank you very much for your support to date and we will try our best to make sure that we deliver on this plan. Thank you very much, and have a good afternoon.

Thank you very much, sir. Ladies and gentlemen, that does conclude today's conference. Thank you very much for joining us. You may now disconnect your lines.