PPC Ltd (PPC) Earnings Call Transcript & Summary

Good morning, everyone. Welcome, and thank you for joining us at PPC's year-end results for the 12 months ended March 31, 2020. My name is Kwame Antwi, and we are going to be hosted today by the Group Chief Executive Officer of PPC, Roland Wijnen. He's also going to be supported by his entire executive team during the presentation. [Operator Instructions] Before I hand over to Roland, it's just also come to our attention that we are having some technical difficulties loading the presentation and the AFS on our website. The team are busy working on it to ensure that, that is resolved speedily. At the same time, we're also engaging with Vault and other service providers to make sure that we load that as quickly as possible. So we apologize for the inconvenience. Without taking too much of your time. I'm going to open and hand over the virtual podium to Roland. So Roland, over to you.

Thank you very much, Kwame. Good morning, everybody, and a special welcome to the webcast for our results for the full year ended 31st of March 2020. Before I start, I would like to thank those of you who were able to attend. We know that we've kept you in suspension with those results. And if it were possible, that my hair would be grayer than it already is. The last 5 days, it would have turned a lot grayer. We've been through a very diligent process. Our finance team, together with our auditors from Deloitte, and I believe that it has helped us in making sure that we present to you a set of results that have a high level of integrity. In the content slide, next slide, please Kwame, you will see that after my introduction, I will hand over to Ronel for the results from a financial perspective, followed by an operational review, trading update and an update on the capital restructuring for myself, a few closing remarks on the strategy, and then we open for Q&A, whereby I will be supported not only by Ronel, but also by Njombo as the MD for South Africa and Botswana, Mokate as the MD for International and Anthony as the Executive Director focused on the capital restructuring. Before we go into the details on the next slide, I would just like to remind you of something that is important to me, something that I've also shared with you during the interim results. I believe for a company to have a good sense, it needs a purpose. And PPC has a very clear purpose, which is to empower people to experience a better quality of life. However, in order for us to sustain that purpose, we need to make sure that we are driving performance that we have delighted customers, that we have superior products at the lowest possible cost and that we excel in everything what we do. And of course, driving performance will ultimately result in ensuring financial sustainability. When I was in lockdown, I listened to podcasts, and one of them talked about a company of more than 100 years and companies that got into difficulties. Three reasons: corporate arrogance, lack of purpose and an insufficiently strong balance sheet to withstand crisis. At PPC, we are removing any part that might refer to arrogance. We want to be seeing that all our stakeholders as a reliable partner. We're working on our balance sheet and the purpose we have. We are contributing to the lives of thousands of people in all the jurisdictions where we operate. And I would like to take also a moment to thank all our people in the business to make sure that we can sustain our purpose by driving performance on a day-to-day basis. If we look at the group performance overview for the financial year '20, I think the highlights are that we are operating in a weak macroeconomic background, especially in South Africa and in Zimbabwe. We are faced with overcapacity in South Africa as well as with DRC, and both these countries are therewith under an increased competitive pressure. And both these countries, South Africa and DRC, are faced with imports and nonconforming products where we continue to engage with the authorities to make sure that the industry gets the level of protection it deserves and that nonconforming products that lead to the potential of collapsing building and other structures are removed from the market. I will touch upon the COVID-19 impact that unfolded late March when I talk about the trading update for the financial year '21. Our focus areas have been five: First, to address the capital structure so that we can position PPC for future growth; second, to improve the quality of revenues to make sure that we implement price increase sustainably, and that we can serve the customers that are closest to our plants in order to optimize the margins; cost competitiveness and cost reduction programs is part and parcel of our business and it will never go away from our focus areas; the fourth point, focus on cash generation is something that I would believe we have paid much more attention to in the last 8 to 9 months than before. Stringent net working capital, stringent CapEx to make sure that we focus on positive cash generation from our operations. And the last one, where we have positive results, thanks to the mega plant strategy in South Africa that allowed us to reduce our CO2 emissions, we are looking at minimizing our environmental impact. And those are as well related to the actions that we have taken. If I look at the salient points of our financial performance, before I hand over to Ronel. In a summary, if we look at the next slide at the profitability, we will see that our group revenues stand at ZAR 10.2 billion and which is slightly down from last year, and we see a reduction in our EBITDA of ZAR 300 million, largely driven by the reduction of activities in South Africa. An important point to mention, and it will be unpacked further by Ronel is the impairments of ZAR 3.1 billion that obviously are not cash effective, but are impacting the profitability in the income statement. That results in a loss per share that I had unfortunately to report of ZAR 1.24. However, the headline earnings per share have grown slightly from last year and are currently standing at ZAR 0.27. If we look at cash generation and financial position, for us, a very key indicator is the cash generated from our operations, which has come down due to the lower EBITDA as well as the higher net working capital, which will also be addressed by Ronel when she unpacks the numbers. Important numbers are the gross debt in South Africa, which has slightly grown on the back of the higher net working capital. The international gross debt has grown purely due to the currency impact. And it is important when I talk about the capital restructure to understand that we have a significant amount of debt out of the DRC as recoursed to the group, and I will unpack with you how we want to address that going forward. With that, I will hand over to you, Ronel, to go into more detail for the financials, please.

Thank you very much, Roland. Welcome, everyone. Thank you for making the time to go through the results with us. I will start by addressing revenue. And we are presenting to you a revenue bridge, showing you the movement between March 2019 and March 2020. In March 2019, our turnover was ZAR 10.5 billion, decreased slightly to ZAR 10.2 billion with, as Roland said, the largest contributor being South Africa and Botswana. We have benefited slightly from currency, ZAR 275 million, with Zimbabwe's hyperinflation also contributing ZAR 263 million. If we then move on to the EBITDA bridge. Last year, we ended on a ZAR 1.9 billion EBITDA and this year on ZAR 1.6 billion. But if you compare like-for-like, we ended on ZAR 1.8 billion. The movement between last year and this year, again, South Africa ZAR 344 million negative contribution. And what also sticks out a little bit here for you maybe is the ZAR 198 million from group services. I would just like to point out that it may appear slightly misleading. That is the movement year-on-year, and it represents part of our restructure of shifting down activities into business, and therefore, fees uncharged have decreased. So that it looks like a poor performance from an EBITDA point of view from group services. If we then look at the adding back of the restructuring costs and add back the change in expected credit losses, which is included in what we traditionally calculated as EBITDA. And you will also note that we've added back for you the cash impact of rent paid. After the introduction of IFRS 16 on leases, the EBITDA number between March 2019 and March 2020 would not be comparable. So we've taken that out for you. We can then move on to the key income statement items. The impact of noncash items, the first one there is ZAR 151 million fair value and foreign exchange gains. That relates mostly to the translation of the foreign-denominated intercompany loan with the DRC. The next item is a gain on the remeasurement of the DRC put option liability. The value of the put option is determined in terms of a formula contained in the agreement. And according to that formula, at the end of March 2020, the option is out of the money. And therefore, at year-end, we reflected a 0 liability. Fair value loss on Zimbabwe blocked funds of ZAR 258 million represents an 85% credit adjustment at year-end. I'd just like to point out on the Zimbabwe financial asset, we regarded the credit risk to be lower. And as such, we adjusted that by only 50%. Reason being we do have an agreement with the Zimbabwe Reserve Bank for the payment of our debt in Zimbabwe using our legacy funds, and we also have a history of payments being made. While on the blocked funds, we do not have those 2 items in place, hence, the difference in the credit risk. We also show a ZAR 651 million net monetary gain on hyperinflation, which is a result of IAS 29. It's quite technical. So if anyone has any questions on the application of IAS 29, it would probably be more appropriate to take that off-line. On the impairments, I think it's important to point out that IAS 36 does not permit cash flow forecast utilized in the calculation of the value in use that we use for the impairment calculations to take into account any initiatives for restructuring or cost saving that have not commenced at year-end. And it also does not permit adjusting cash flows to take into account any change in the trade between year-end and thereafter. So if at year-end one expect a certain trading pattern, and 3 months later, the trading pattern is either better or worse, one may not adjust the cash flows to take that into account. Add to that higher discount rates as at March 31, 2020, resulting from the pandemic impact worldwide, we ended up with impairments in South Africa of ZAR 1.9 billion and in the DRC of ZAR 1.1 billion. On our tax, the effective tax rate is a negative 5%. Only 2 major items contribute to that. The one is deferred tax assets resulting from taxation losses or arising from taxation losses that were not raised of 17%. And the impairment of PPE in the DRC that I just mentioned, there was no deferred tax raised on that of 15%. That gives us the standard tax rate of 28%. Headline earnings reconciliation, just setting out there, adding back the impairments. The tax impact thereof, that's only the South African portion. Goodwill impairments, loss on sale of assets and then our headline earnings moved from ZAR 227 million in the prior year to ZAR 205 million in the current year, with ZAR 406 million being attributable to shareholders of PPC in the current year compared to ZAR 300 million in the prior year. From a cash flow point of view, just the movement in cash balances. We generated operating cash flows of ZAR 1.6 billion. Working capital movements, just less than ZAR 450 million, mainly consisting of buildup of strategic inventories and the advanced payment work -- earlier payment of trade payables. Then that leaves us with cash generated from operations of ZAR 1.2 billion, finance costs ZAR 612 million, tax ZAR 140 million and CapEx ZAR 662 million. With a little bit of cash inflow from finance activities, so leaving us with a net movement in cash and cash equivalents of ZAR 80 million for the year. From a capital expenditure point of view, quite an interesting slide that tells a story in March 2020. For the year, we have spent ZAR 662 million on capital expenditure, which is on the lower side of the guidance that we provided between ZAR 600 million and ZAR 800 million. For the year to come, we estimate that our capital expenditure for the year to end March 2021 will fall between ZAR 550 million and ZAR 600 million. From a debt point of view, we -- the debt increased from ZAR 5 billion at March 2019 to ZAR 5.8 billion in March 2020. Of the movement, ZAR 638 million is due to the currency impact with our offshore debt being denominated mostly in U.S. dollar. South African debt increased from ZAR 1.8 billion to ZAR 2 billion at year-end. And international gross debt increased from ZAR 3.2 billion to ZAR 3.8 billion. At March 31, 2020, PPC had international gross debt with recourse to South Africa of ZAR 2.7 billion. From a going concern assessment point of view, a lot of work has gone into this part of the process. We have kept shareholders up-to-date on the process of our refinancing and restructuring project. And one of the first milestones was to agree revised facilities with our South African lenders. We managed to agree these facilities and revised covenants with our lenders, and we thought we would just share with you what these were. The interest cover, gross debt-to-EBITDA and group gross debt-to-EBITDA. These facilities, as you know, we have communicated this to you include de-gearing of the business through a rights offer and sale of noncore assets. Our cash flow forecasts and considering the facilities available to us, indicate that our headroom will remain above 25% for the foreseeable future. So I'm sure a lot of people have questions around the prior period restatements that we have communicated to the market. And although some of those prior period restatements have a lot to do with technical interpretation of complicated accounting matters, we have to look inward and admit and accept that we have internal control weaknesses and that our financial reporting processes are not up to scratch. Frankly, this has been identified a number of months ago, and we have, therefore, initiated a number of improvement projects. We are reviewing our internal control environment to identify all the gaps and all the opportunities. We have initiated a project to standardize all our policies, ensure that our procedures are in line with the policies that it addresses all the risks, that our systems are standardized and that we can prepare and issue timely, quality and standardized management reporting on a monthly basis. We have also gone through a restructuring process of our head office group services, and in particular, the finance team in South Africa, and we are currently busy recruiting appropriately qualified and experienced personnel. Putting all these things in place, we are confident that we will see improvement in the control environment and the overall financial reporting process of PPC in the not-too-distant future. It will be a lengthy project to finalize, but I think we will see improvements reasonably soon. So in summary, our results were impacted negatively by impairments and also impacted by various fair value adjustments. Capital expenditure was well managed. The international debt position increased mainly due to currency movements. For the financial year of 2021, working capital and cash preservation will be a focus within PPC. And then lastly, as I mentioned, it's an absolute key focus area for PPC Executive Committee to improve the overall control environment, in particular, in the finance function. With that, I thank you for your attention, and I will hand back to Roland to take you through the remainder of the presentation.

Thank you very much, Ronel, for that insight in financials. I will now go in a little bit more detail on the different countries from a revenue and EBITDA perspective of the year, financial year 2020. If we look at the South African cement business, which is still roughly 50% of our overall revenues, we see a decline, which was largely driven by a volume decline. So the volumes of PPC declined 15% to 20% in a market that declined up to 10% according to our estimates. We have, as you know, as we've said already, at the first half, chosen for hefty price increases during 2020 to make sure that the whole industry and PPC has more viability going forward. We have therewith anticipated market share release and volume decrease. The volume decrease that we have seen for the full year is in line with the first half, which indicates that we have reached the stabilization level. And as I will show to you in the update for the trading that we have seen in the current months, PPC is now benefiting from flexibility that we have in our supply network. We have rationalized our costs to make sure that on those levels of demand going forward, we have a more profitable business than what we have seen in the financial year '20. We also were impacted in the cement business by the fact that the industrial segment and the construction activities like ready-mix were more down than the retail business and [ SPPCR ] high-quality products are relatively used to a larger extent in these segments. You see that as well in the revenue of raw materials, which have declined similarly to cement. Our lime revenue has not declined that much, largely because of the price increases that were implemented during the year. And our international business has seen positive growth in their revenues across all the geographies. Whereby I do make a footnote on Zimbabwe because of the hyperinflation, hocus pocus. And therefore, we focus in Zimbabwe very clearly on the cash generation and the EBITDA margins, which have continued to move positively. If we move to the next slide, we'll talk about the EBITDA in different geographies. So you see there that our overall EBITDA declined by 18%, as it was explained to you by Ronel. You see in the South African cement business, the impact of the fact that we have not yet seen the benefits from the fixed cost decreases that Njombo and his team have implemented during financial year '20, we will see those coming through in the financial year '21. The positive impact in materials was largely due to our aggregates business in Botswana and cost containment actions that were taken prior to the financial year '20. The lime business shows the decline due to cost increases. One of the cost elements is, of course, the CO2 tax, which were, on the one hand have seen in the prices, but now you also see it on the cost side. The big increase in Zimbabwe is largely driven -- or is driven by hyperinflation accounting, because the underlying market in Zimbabwe during the year was not positive, especially the first half year, we saw a decline in volume of 30% to 35%; in the overall year, we see 15% to 20%, which is a good sign because it means that the last 6 months of the financial year '20, the volumes in Zimbabwe have grown compared to the prior period. Our EBITDA generation in Rwanda and DRC. In Rwanda, it has been impacted by the fact that we had higher operational expenses during the second half of the year, which we did in order to make sure that the plant gets debottlenecked, and we'll see that as well for this year in certain CapEx, which I will show to you in a second. In the DRC, the EBITDA decline is largely due to the fact that we have 2 cost elements that were not in the prior year. One of them is a, call it, left pocket right pocket. And we have started to implement a management fee scheme for the DRC to cover the cost of the support that the company receives out of South Africa. This was not in place in the prior financial year. And secondly, we took a one-off write-off of certain development costs related to the construction of the plant that we did not consider will able to be capitalized. Without those impacts, the DRC would have a similar to better EBITDA level than we have seen in the financial year '19. The EBITDA margins per group are on the left bottom of that slide, except for Zimbabwe, they have only one way, in my opinion, and that is up. For me, none of these EBITDA margins properly reflect the potential that we have as a business. And together with Njombo, Mokate and their teams we are seeing, especially in the last 3 months, much better EBITDA margins than what we saw for our financial year '20. Overall, the international business now generates more than 50% of our overall group EBITDA. However, as much as I like our international business, I would rather see our South African cement business recovering so that we have a higher EBITDA coming out of the pie of South Africa. Remember in revenues, South Africa is approximately 50%, and we would like to see EBITDA moving closer to that level as well. If we go to the trading environment for financial year '21, I first would like to spend a few words on the COVID situation. When we saw COVID coming in, we immediately established a COVID-19 task force, together with our Group Chief Information Officer as well as our health and safety personnel. We implemented what was needed to be implemented to keep our people safe and to reduce the risk of spreading the virus. If I look at the right side of the plant -- of the slide, we looked at immediate cost reductions. Of which we found roughly ZAR 150 million just in South Africa. This was largely based due to sacrifices that our people have made by reducing their leave, many people have worked through the crisis, have still contributed by leave reductions, and we are very grateful for their commitment. We have reduced CapEx in South Africa by ZAR 125 million. Now for those of you who remember the slide of Ronel, just a few slides ago, she showed you guidance of ZAR 550 million to ZAR 600 million of CapEx for this year versus ZAR 662 million in the last financial year period. So you are wondering where is the ZAR 125 million. The ZAR 125 million sits in South Africa. In international, we see a slight increase of CapEx year-on-year. This is due to the fact that in Zimbabwe, we will be installing filters to improve the compliance of our plant in Colleen Bawn. And obviously, the dollars that we are generating in Zimbabwe, we would like to put in a good use. And in Rwanda, we have an increased CapEx to make sure that the plant will reach its optimal capacity in the next 12 to 16 months. So in my opinion, still a very good performance if we can come within the guidance and improve our integrity and output of our plants. If we go to the next slide, I'll give you an update on where we stand in the volumes. So here you see cement sales volumes across our geographies. And you see the very strong impact of the lockdowns in South Africa, Botswana and Zimbabwe versus a very mild impact in the Rwanda and the DRC. And you see, as we have communicated earlier, a very strong uptick in the second quarter of our financial year. So the last 3 months, where South Africa and Botswana had a 20% to 25% increase in sales volumes. And this is where we see a strong recovery in the South African economy, partially from a catch-up of construction work that got delayed and partially also from the retail work and from a reduced amounts of imports in the first months of the COVID crisis. At the moment, we see, unfortunately, that those imports are coming back into the market. And we are looking at the South African government to move fast on the high-tech application that the Concrete Institute has finalized, and we are waiting for the government to respond. Overall, we see in our international business that for the first 6 months, we expect 5% to 10% volume growth, which is obviously very positive, given the fact that we've just gone through one of the worst global crisis in terms of the pandemic. If we look at our EBITDA on the next slide, that translates. Although I'm not a fan to show monthly EBITDA numbers because they are highly impacted by shutdowns and cost spikes. I do think it is relevant for you to see that in our geographies, the trend is positive. If you look on the left, you see South Africa and Botswana cement EBITDA generation and the red line is now catching up fast with the gray line, which is the performance of last year. And we hope to be able that by September, October, we can actually break through the EBITDA generation from last year and structural growth on our EBITDA line. In Zimbabwe, again, impacted by hyperinflation accounting, and we already see that we are at higher levels EBITDA generation than last year. And also on the next slide, you see that in Rwanda as well as in the DRC, our year-to-date EBITDA performance until August is trading above the levels where we were last year. Just as a footnote, you might wonder the spikes in the right-hand side of the DRC. Those spikes are caused by the fact that our kiln is not around continuously. So you have stock movements, which is another reason why showing monthly EBITDA numbers is not always an easy comparison. But the underlying message is very clear. Internationally, in Rwanda, Zimbabwe and in the DRC, we are trading above last year EBITDA. And in cement, South Africa, we are catching up fast. Well, you see it as well as on the next slide, where we show you the South African gross debt, which is benefiting from the improved cash flows that we have been generating, especially in the last 3 months. And you see that the debt that stood slightly above ZAR 2 billion in March 2020 has come down by the 30th of September to ZAR 1.8 billion, which also was communicated earlier to the market. This brings me to one of the most important aspects of this presentation, in my view, which is the group capital restructuring. And I would like to give you some background so that we are all in the picture of what is going on and what happened. In the DRC, our investment in PPC Barnet is funded by approximately ZAR 150 million senior debt. PPC Barnet is operating in an overcapacity, and it is not generating sufficient EBITDA to serve that debt. PPC Limited has an obligation to supply what is called deficiency funding to Barnet, if it is being requested to do so. And that is the debt that Ronel referred to as debt with recourse to the group. We have made clear since November, December that this needs to be dealt with on a sustainable basis rather than short-term solutions, which would be the capital holidays that we were able to agree in the past. And since November, December, we have consistently made clear to the international lenders that we need to find a solution that removes the dependency on the group and makes a proper capital structure for the country and for our international business. When COVID lockdowns came, we got an additional complexity, which is that also the South African lenders looked at PPC South Africa and a bleak outlook, early April. And asked us, we need to strengthen the South African financial position, the South African balance sheet. So from 1 issue, we became 2 issues. And to be very frank with you, post March, a lot of work has been done in that direction. And I would like to take a moment to recognize the support that we, as an executive team have received not only from external people, but also from people like Anthony Ball, who stepped down from a nonexecutive and came in and rolled up his sleeves. It is difficult to recognize when you're looking at this from the outside. But I can tell you, April and May at PPC in the lockdown, with all the banks around you, I have been very blessed to have a strong support from the Board and from our management team, and I'd like to thank them for that. In the meantime, we have appointed transaction adviser. And of course, we have implemented the immediate cash preservation measures that I alluded to before. So if we look at where we stand today and what milestones we have reached, as we communicated, we have renegotiated the arrangement with our South African lenders, and Ronel showed you some of the details. These are substantially complete. The lawyers are dotting the Ts or they're crossing the Ts and dotting the Is. In the international side, we have agreed or we're in the final stages to also put it down on paper that we have a standstill that will allow us to make a long-term restructuring plan and make that happen. Of course, the third point, the financial performance of the group is tracking ahead of the expectations that we have shared with these banks, and that without any doubt, gives us more credibility as we go forward. These steps forward can basically be outlined in the following. The first and foremost is to restructure the debt in the DRC, so that the ZAR 150 million becomes a different number that we raise equity and that we remove the recourse to the South African balance sheet. In order to do that, Point B, we do know that we need to raise equity in PPC international, of which the quantum and the timing is to be confirmed, and we're expecting to confirm that early calendar year 2021. Therewith, we will achieve Point C, which is to have an international business that comprises of our Zimbabwe, Rwanda, DRC and potentially other businesses independent from South Africa, each of them with appropriate financial positions, i.e., balance sheets. Only and only then, we would be looking at strengthening the South African and therewith the group financial position through a rights issue that we are estimating in the range of ZAR 750 million to ZAR 1.25 billion, which will be primarily used to reduce the South African debt after the completion of the points that I mentioned to you before. At the same time, we are looking at portfolio changes. The lime asset is considered as a nonstrategic asset for us. And therewith, we are looking at divestments. We are also looking at other assets that we have that could generate cash that can be deployed better. Just to wrap up the capital structure, I would like to reiterate 3 more points that the capital raise at PPC Limited level is contingent on finding a resolution for the PPC Barnet capital structure. And I cannot put it more simple as no resolution, no rights issue. Secondly, it needs to be understood that rights issue is the last step in the restructuring process. And as a consequence, the pricing of that rights issue will be done at a time when the financial market has no longer the uncertainty that it currently has around the situation in the DRC and the recourse that it has to the group. So that is a view on the capital restructure. Before I summarize, I would like just to share with you 2 slides on the group strategy. The group strategy has not changed. And sometimes people ask me, Roland, what is your strategy? And the strategy for me lies in execution so that PPC demonstrate that it is a leading cementitious producer throughout sub-Saharan Africa. A cementitious player that is selectively active in related businesses like aggregates and ready-mix. And already from this, you see that we do not consider lime as a strategic business to the cementitious materials of PPC as a group. I would like to reiterate the guiding principles, which is our purpose comes first. We would like to improve the lives and the quality of the lives of many people across Africa, but we need to be performance driven in order to get to that purpose. Simplify, standardize and automate are now 3 words that resonate throughout our business. It will improve our controls. It will improve our outputs in the processes and administration and it will reduce our costs. A sharp eye on cash generation and value generation. We have deployed money from lenders, we have deployed money from shareholders, and it's our duty to return -- to bring and return to their money invested. And we will do that by offering the best value product to our customers at the lowest possible delivered cost. In putting in place measurable objectives, we are putting in place, and we have put in place a measure that measures the economic value-add concept. So how much is the cash we generate out of the cash returns that would be expected from the people that provide us the capital. We recognize the necessity that we will be leaders in minimizing environmental impact. The aspects of concrete in the building construction industry are huge, but also the benefits are huge. And we will be looking at making sure that we have innovative products that have the lowest possible clinker factor that will use alternative fuels instead of coal that we implement energy efficiency. We are proud that we have signed a solar project in Zimbabwe that will replace part of our dependency on coal-generated electricity, and we are well underway to do the same in South Africa. And last but not least, our employee engagements and we're shipping therefore the recognition that we are attracting and retaining top talents throughout our group. Whilst we do that, we have formulated 8 material matters that we would like to address. Group capital structure are number one, and I addressed that, and we are preparing for a prolonged contraction of South African construction activities. We do not see that the current uptick that we will -- that we have enjoyed for the last 3 months is something that we expect for the 12 to 18 months. However, if the government of South Africa puts in place a infrastructure spending program to revive the economy, PPC without a doubt is best positioned to benefit from that. Number three, we are looking at governments in South Africa, but also in other countries to address substandard cement. It is a risk for the people that are building their structures. And together with it, the imports. The cement [Technical Difficulty] strategically for every country in its development, and we cannot let it happen that a country like South Africa becomes dependent on imports that can be switched on or switched off as the world market pleases. We keep a close eye on the regulatory environment. We try to help the government to make sure that we have a supportive, predictable environment that is conducive to investments. We have recognized that our credibility to external stakeholders is not where we'd like it to be. We would like PPC to be recognized as a company that does what it promises each and every time, our customers, our government, our people. As mentioned by Ronel, we have recognized that the governments and control framework of this company needs work, and we will relentlessly work so that we can show you and demonstrate you the improvements in that area. That brings me also to a basic of performance management and employee engagement. We will be launching further leadership trainings throughout the group to make sure that we apply proper recognition for people who do a good job and proper consequence management wherever required. And last but not least, in order for PPC to advance, we need to have access to the latest innovation and technology. And we would like to describe PPC as the fastest follower. And with that, I mean that we will be looking at our peers in China and in Europe and try to copy as fast as possible the latest technologies in order to reduce our clinker factor and improve our outputs and our efficiencies. With that, I would like to come to a close and invite you to ask your questions through the website, if not already done. In summary, I think we can summarize it as 4 points. Financial year '20 showed difficult trading conditions. We acted swiftly to protect our business at the on rise, not only of COVID, but also at the expectation of a prolonged contraction of the construction industry. Successful execution of our capital restructure for the coming 6 to 9 months is required to reposition our business to capture the growth opportunities that we see in sub-Saharan Africa. And last but not least, we do see some green shoots if we look at the last 3 months. And therewith, we are positive as we look into the future. With that, I would like to close and hand over to Louise for questions. Thank you very much.

Thank you, Roland. Our first question comes from Rowan Goeller of Chronux Research. He says, can you give some more detail on the international capital raise? Will it be financial, trade buy or general share sale? And then just -- apologies. Just on that, we also have a question from [ Peter Krombach ] of [ Mutual Market ], where he has asked what assets or non-core assets can be sold to bolster liquidity as well on that topic.

Anthony, would you like to speak about the potential for the international equity raise?

No, Ronald, you go first. I think we've got -- you got the answer there.

Okay. In the international equity raise, we look at various options. We're looking at DFI, we're looking at sovereign wealth and we're looking at potential strategic investors. So at the moment, we still have a very wide range open. We will be engaging with our lenders shortly in order to show them what we see are sustainable debt levels in the countries where we operate and therewith what kind of investments are we looking for. In terms of our portfolio, lime has been mentioned as a nonstrategic assets. In addition to that, we are closely looking at all elements of our portfolio. And if I just may keep myself a little bit on the background as to what that exactly means, it would help us in the potential divestment process. So I would not like to allude on which part of the portfolio we are currently assessing. On top of that, we also have some properties that we are looking to divest because they're not generating cash, obviously.

And next question comes from David Fraser at Peregrine. He's asked, if you can give an estimate of available tax losses in each country.

Thanks, Louise. Thanks for the question, David. Okay, in South Africa, we have about ZAR 625 million worth of tax losses. At the current tax rate, that would give you a potential of ZAR 175 million in tax. In Botswana, we have ZAR 140 million that translates into ZAR 30 million of tax. In Rwanda, ZAR 680 million, translating into ZAR 205 million. And in the DRC, ZAR 1.4 billion losses translating to almost ZAR 415 million in taxes.

I think while we're on you, there's another question, a follow-up from David Fraser at Peregrine. Please give us an idea of cash restructuring costs incurred in FY 2020.

That was ZAR 108 million.

The next question comes from also -- sorry another one from David. When can we expect -- and I'm not 100% sure what he's referring to here, but he's asked when can we expect a normalization of volume levels this year. Is this anticipated by the September half or only for the full year. Perhaps he's referring to volumes, not sure.

Yes. I would say in general, David, thank you very much. In terms of volumes, we are currently trading in South Africa, as highlighted for the first half year, about 5% to 10% below last year. And we will see October, November and we're probably catching up. In terms of the margins, I would rather refer to it as a full year in order to make sure that any maintenance costs that we have not incurred in the first half year and we will incur in the next half year. So when we come to interims later in this year, you will see the impact of course in the first 6 months. And in second 6 months, we expect an uptick in EBITDA. And as I said, the normalization, if we're looking at EBITDA margins in South Africa cement going back towards 20% is probably only going to happen in the financial year 2022, depending on the further investments from the government. Thanks, Louise.

We have a few more follow-up questions that came through on the back of the previous comments around the restructuring. There are quite a few. So I think I may just read all of them out at the same time, so that we can then prepare for those. So the first one is, is the intention to dilute in PPC international after the refinancing and would that result in a deconsolidation of the DRC debt at the PPC group level? And then that comes from our Mark Narramore at Excelsia Capital. The next one comes from Nick [indiscernible] at Signal Asset Management. The uncertainty related to the capital restructure has put a lot of pressure on the share price. I'm not 100% clear on the DRC restructure. Is the ultimate goal of debt for equity swap diluting PPC? And is there a possibility for debt forgiveness? And then the last one is from David Fraser at Peregrine, in addition to raising fresh equity in the international operation, would you consider a sell down as well as a way to reduce the SA equity raising?

So Louise, can you just repeat the last question?

Last question is, in addition to raising fresh equity in the international operation, would you consider a sell down as well as a way to reduce the SA equity raising.

Okay. Let me try to talk through the 3 questions, starting with one of Mark. So if we look at our DRC, one of the solutions is deconsolidation, yes, is a potential solution. At the moment, we have all our options open. Debt for equity, yes, is part of the solution, a debt reduction so-called haircut from our side, definitely a solution, from the lender side, obviously not preferred. So that is something that we need to talk through with the lenders. And overall, debt for equity and fresh equity in PPC international will lead to dilution from PPC Limited. At the moment, we hold 100% in our PPC international business. And then within the countries, we hold majority, as you know. In [indiscernible] it is 51%; in the DRC, it is 69%; and in Zimbabwe, it is 70%. That will come down through the international structure if we raise equity in the international structure. Right now, there are still very many solutions to this problem. And I know it is unclear what the outcome is. If I would have a crystal ball, I would tell you what the outcome is. One thing that I do know is that finding a solution is something that is in the best interest of all the parties that are involved. And that gives me the confidence that over the next 6 to 8 months, we will implement one or the other solution. Anthony, would you like to add something to it?

Thanks, Roland. Just to emphasize on the point about consolidation of the debt. I think the critical thing here that everyone is working towards is to take the balance sheet risk of the international operations away from South Africa. So irrespective of what the accounting treatment is, it's the financial goal to renew that. And that's more of a driver for us than whether we do consolidate the debt or not.

Yes. Thanks, Anthony. I think we cannot reiterate that enough. But for us, the rights issue of PPC Limited, as I said, is contingent on having the DRC result.

We have another question from [ Peter Krombach ], he's asked what is the sustainable level of leverage for the SA Group going forward?

We have made agreements with the banks in terms of de-gearing. I don't have the exact number on the top of my mind, and I doubt, but I'll ask Ronel and Anthony whether they have the number on top of their mind.

I'll offer some comments on that, Roland, so there's probably more of a philosophical point. I think what we've all learned and get reminded on -- reminded about some tons of difficulty is that gearing is not a comfortable thing in businesses that are going through cycles. So people talk -- the typical market covenant for debt is about 2.5x EBITDA. But when you factor in cyclicality, need for headroom, certainly, through my view, that you've got to transit here towards running your business around about 1.5x debt-to-EBITDA would be the kind of goal we'd work towards, albeit that will be covenanted at a more generous level, probably around about 2.5x, which is round about the South African convention at the moment.

And we have a question from Siphelele Mdudu from Excelsia Capital. Given the revised facilities and covenants, what has happened to interest rates? And then a follow-on sale of PPC lime, have you had any interest yet on this? And how far is this process?

Ronel, would you take the first part, please?

Thanks, Roland. Yes, we have seen an increase in the cost of our debt. I suppose that is what comes with support from your lenders in difficult times. So yes, the cost of finance has increased.

Thanks, Ronel. And in terms of lime, yes, we have knowledge of interested parties. However, we've also recognized that we need to demonstrate a certain amount of improvements coming out of a change in the customer portfolio. And therefore, we would not initiate the sales process right now unless there is an excellent deal that comes on the table. But we have a clear idea on who could be the potential buyer.

Next question comes from David Fraser at Peregrine, again. After the working capital spark, can we expect a working capital normalization by year-end?

I can give you a short answer to that David, the answer is yes.

Next question is from Jeffrey [indiscernible] of Top-Flite Asset Management. Over 30% of your equity has traded in the last 2 months with no shareholder announcement, who has been doing all this volume?

Yes. Thanks. Some announcements were made. So the PIC has changed its view and does not consider the cement industry as specifically their investment into PPC as strategic to our understanding. So they have been on a consistent sell down. Some of this has been picked up by one particular South African assets manager. However, nobody is above the 5%. Therefore, no announcements we'll make.

The next question is at this kind of valuation, truly one of the larger Chinese or international cement companies or building material companies will look for an opportunistic taper about PPC. What are your thoughts on this? Also from Jeffrey [indiscernible] of Top-Flite Asset Management.

Yes, Jeffrey, you would expect so, right? But we have spoken with most of the strategic investors as we are looking for various ways in our international venture, and none of them have expressed any of these opportunistic interest so far.

There's a couple of questions from Myuran Rajaratnam from MIBFA. He's asked the first one, what EBITDA margin is reasonable in the medium term that allows a suitable return on your invested capital in the SA? That's the first question. The second question is around the ITAC application. Does our government understand the deindustrialization going on in South Africa that imports are destroying SA companies from any suitable returns on capital?

In terms of EBITDA margins get suitable returns on the asset, you're looking at something that would be above 20%. If you look at the question whether the South African government understands the necessity for industrial environments, I cannot speak on their behalf. But what you've seen happening over the last year is for us of a concern. And that's why we have made a point to the ITAC. And Njombo can probably be a bit more specific on some of the more encouraging interactions that you recently had with the ITAC. Njombo?

Thanks, Roland, and thanks for the question. Yes, we're making progress with the government with regards to the ITAC application. In fact, we've got the factory visit with them towards the end of the month during their investigations in terms of the application that we've collectively as an industry put through. And we are engaging with Dr. Ramafoko on the investment and infrastructure. And in dealing with the government, there is a realization that they have to do something about deindustrialization. And as you have heard, the President talking about localization, and we basically use those opportunities to point out what the situation is with the construction and the cement industry.

We do have a similar question, yes, so maybe just while we have you on. Can you give us more details on the current levels of imports?

Well, the imports, basically, when we started the calendar year, they were just at the same rate as what they were in the last year. So we still are experiencing the fact that they are higher. But we definitely saw a decline during the lockdown period, obviously. And we expect that with the challenges coming into the country post lockdown, there is a slight slowdown. But we're expecting that we will succeed with our application with the government as has been seen with the current movement.

We have another question in regards to the SA market. That like any additional comments on demand and supply dynamics in South Africa. And that's from Chris Reddy at Mazi. And then from Charles Boles at Titanium Capital, he has asked if without a government infrastructure program in SA to lower demand is the SA industry sustainable without further consolidation.

I will start with the last one. In terms of the government infrastructure, I think we have made it very clear that it is required to boost not only cement industry, but the construction industry as a whole and I think the government is aware of that. The investment and infrastructure that is led by Dr. Ramafoko, which -- who we are engaging quite extensively with has started showing some green shoots. There's about 50 gazetted strategic projects from the government, which are including transport water, sanitation and human settlement which are all areas that were highlighted during the COVID period. And there is some projects that are starting to take on and they've broken ground on that. There's ZAR 360 billion that has been spoken about. And that is the only way in which it can boost the economy. So in terms of those 50 projects, we're expecting that they will be expedited. And then coming back in terms of the current situation, we are very pleased that we were actually surprised by a very unexpected unprecedented demand post COVID. And at this stage, we are seeing a very high demand, especially from the retail side of the business, which is boosted by, obviously, the reduction in interest rate that has created some cash gen in people's pockets. And that is currently driving the demand and we're quite encouraged about it.

We have a question from Nick [indiscernible] at Signal Asset Management. I don't understand the economic viability of Zimbabwe. If the profits are going into Zimbabwe bonds, the operation does not seem viable to me.

Mokate, do you want to give a view on Zimbabwe, please?

Thank you, Roland, and thank you, [ Nick ], for the question. I think the issue of Zimbabwe has come up in several discussions. But the reality is we have 2 options. You either exit Zimbabwe now or you stay in Zimbabwe at this stage. So if you exit, what are you going to get out of Zimbabwe? The likelihood is you're going to give Zimbabwe away for almost nothing. If you look at the business, the Zimbabwean business has remained very resilient over time. In fact, as -- when we look at the business today, we are actually generating more ForEx, or foreign currency than local currency, which actually allows the Zimbabwean business to be able to obviously sustain itself. But also another obligation with the group, for example, with regards to the services that are provided from the group level. And our discussions with the Zimbabwean governments are progressing very well with regards to ability to repatriate some of the cash. We had several meetings in the last 3 to 4 weeks. We're still expecting the final response, but the discussions are progressing in the right direction.

We have another question from Charles Boles at Titanium Capital. He has asked if the outlook for the DRC and Ethiopia businesses and limited scale of Rwanda justify remaining in these territories. Would it make sense to exit these assets?

Let me take that. Let me just put it like this. And if you look at the results of the financial year '20, the total EBITDA generated by Rwanda and the DRC is roughly ZAR 325 million. The total EBITDA generated by South Africa which has probably 6x more capacity than our investments in Rwanda and in the DRC is ZAR 650 million or slightly below ZAR 650 million. So yes, these assets might be small, but they are profitable. They're cash generated. And I don't think that divesting them unless somebody is willing to give you a fantastic price. And you can deploy that money better somewhere else. The divestment would not be on the radar for us. Mokate, would you like to add something to that view?

You're absolutely correct, Roland. I mean if you look at Rwanda and Ethiopia, for example, I mean, if you look at the micro fundamentals, very strong GDP growth, strong cement demand. And it's certainly the market that you want to be involved in. Very stable country for -- a country like Rwanda extremely stable. Lot of infrastructure rollout, and you want to be part of that growth strategy. I think the issue for us in some of this market has been our ability to maximize volumes in those markets. And that's why in Rwanda, we are addressing the bottleneck of the plant to be able to make sure that we match the demand as it progressively increases. I guess the issue around the DRC is perhaps, if you take out the debt in the DRC and look at the DRC as a business, I mean it's generating fairly good EBITDA running at those levels. The concern, obviously, is the debt level and also the growth of the pie. I think what you've seen is the market has not been growing at the rate that we expected. But as a business, it remains a fairly solid business at DRC.

We have 2 related questions. One from Chris Reddy at Mazi and one from Jeffrey [indiscernible] at Top-Flite Asset Management. But they both relate to the rights issue at, I believe, at group level. The first one from Chris says, please can we get more input regarding the comment that without the DRC restructure, there would be no rights issue. And the second one is from Jeffrey. He's asked if the trading continues in the format that it has been enjoyed in the last 3 months and the ZAR 200 million being taken off the SA debt pile, would the rights issue potentially either be reduced or discontinued?

Yes. Thanks, Jeffrey and Chris to the questions. My comments without the DRC restructuring, no rights issue speaks for itself. I think it just underlines the absolute criticality to resolve the debt situation in DRC. And our lenders are well aware of that. It has taken us some time to get that awareness because people would obviously think that South Africa is a cash generator for our international business. And that, a, is not the case, not sufficiently. And b, every country needs to look after itself. There is no problem in the portfolio from time to time that you have good times and bad times in different geographies. That's why you have a portfolio. But you cannot have one element in your portfolio that is on a sustainable basis, long-term view dependent on other parts of the business. It cannot be like that, and we will resolve that. The second question from Jeffrey, if we continue trading like the last 3 months, and would it have an impact on the rights issue, it is probably logical that it would have because our agreement with the South African lenders is around our balance sheet going forward, not about the amount in the rights issue. However, I would also like to make a caveat here. Our last 3 months have been very strong also because of the fact that we haven't yet done any of our maintenance plans. We haven't done any of our CapEx projects. So we need to get that a little bit in mind. Whilst we enjoy the fact that we have a reduction of ZAR 200 million in our debt, there have also been extraordinary circumstances positively this time that will not sustain itself automatically going forward. But if it were to sustain, if our markets remain strong, even Njombo keeps on selling and collecting and not spending CapEx, it will have an impact because at the end, we're looking at our debt levels and not at the absolute amount of money we would like to raise. From your side, anything to add, Anthony?

Thanks, Roland. Just to emphasize the points, this is the question of Chris' about no rights -- no resolution of DRC, no rights issue. I think what happens in the minds of investors is when rights issue gets mentioned and contents gets mentioned, people think of big discounts in relation to current -- the current share price. I think the point of emphasis here is that we, as a -- to management team and the Board, I do not believe that any fiduciary at this time would be in a position to support the rights issue. And that is because one just doesn't know the quantum of money required to resolve the DRC issue. So it's obvious, therefore, that you've got to resolve that. And once it's resolved, the point Roland made in his presentation is that once it's resolved and the view would be that you're dealing with a differently priced share. Right now, what's priced in this share in our view is a deeply discounted rights issue of an unknown amount and prospectively also solvency. You take those out, and it should follow that once pricing of a different share price. And that also then deals with a question about no resolution DRC, no rights issue. It's not going to happen now. It would only happen once the DRC position has been resolved. And I think that's a position that all parties around the table in the discussions fully understand.

We have a question from Daniel [indiscernible]. Does the SA business require market demand growth in order to grow revenue and EBITDA sustainably? Or are you able to grow your market share?

Before I hand over to Njombo, from my side, I would say that the SA business requires demand growth in order to grow on a sustainable basis revenue and EBITDA. Growing the market share will come and the customers would like to buy from us at premium prices from our competitors. We will not grow our market share by undercutting competitors. This is a business though, where everybody looks at volumes, so volumes play a role. And therefore, I do believe that demand growth is the main driver, and we're coming back to the big better looking housing, infrastructure, et cetera. From your side, Njombo?

Sorry, I agree with Roland. The construction industry in South Africa has been muted for quite some time since post-World Cup. And in terms of the country itself, we do need growth. And as it is, as Roland mentioned, the biggest driver for us is not volume. As demonstrated last year, we said we would like to improve the quality of our earnings and that is the position that we have taken. So we're not really looking at growth in volumes by growing market share. But looking at volume if that was to be supported by the demand that is South Africa need. I mean, all the things that we've mentioned with regards to the investment and infrastructure project that the government is looking at has actually potential to grow demand.

We have our last question, and it's related to imports and also the government, which we were just talking about. But the question asked, do you think the tariff will deter imports? And how will government ensure that the tariff is enforced? This has been an issue in the past. So what needs to happen for it to change?

Njombo?

When we engage the government, the first thing that we actually talk about is we would like to level the playing field. In fact, the crux of the matter is that South Africa has got resources in the form of limestone, in the form of coal. 97% of input in production of cement is actually local. So if you want to boost this economy and improve jobs, the first place to look at is basically your own resources. So over and above just putting the deterrent on imports, it's about how do you utilize your own resources for picking up the economy of South Africa. Yes, the deterrent in terms of the incoming, most of the imported product is actually coming here at pure variable cost. And if you're going to have to compete at that level, it's very difficult for an in-country industry to compete at a variable. But the level of imports, I mean, tariffs that are imposed should be aiming to level that playing field. But beyond that, how do you utilize the resources in the country to actually generate and maintain the sustainability of the local industry, that's the question.

I know we said it was the last one, but one just came in, I think, on the back of the last question. How much cheaper is imported cement in RSA and DRC? And how has the weaker rand changed this dynamic?

Let me take that, Louise. In general, let me just go on the dynamics of these kind of importations and trading. And I have a bit of experience as I run a trading company in cement for a number of years. So what you do as a trader is to start and look at the sources. And if you take, for example, a company in Vietnam, close to the sea that has overcapacity in their own local market. So they have free capacity. As Njombo mentioned, they will then start to sell that to you as the trader at variable cost plus a few dollars, just to make a little bit of more coverage to their fixed cost. Then you have to add to that, the shipping cost, which normally because of the main outflows of commodities from South Africa is quite pretty cheap because you can go to on a backhaul of the output flowing goods. So then you come in landed cost in dollars. You translate that to the local currency. So for us, of course, the weaker rand in this particular case, the higher the landed cost in rands will become. But for us, a week dollar -- a weaker rand has a lot of negative consequences as well. And then you end up with a landed price after clearing the customs, et cetera. After that, the trader will look into the market and say to anybody, would you like to buy my cement at 10% discount to the local market price. You would probably need about 10%, 15% in order to get his goods of his hands. If that makes money, the deal is made. It's pure trade. And that works like that in DRC, works like that in Kenya, works like that in Tanzania and works like that, wherever you go in the world. And that works in South Africa as well. What we have seen is that come a rand to dollar of 18.5% to 19%, it becomes unattractive for traders to set up the trade. So that is sort of the levels that we are looking at currently.

We have no further questions -- sorry, one last question. From [ Ilham ] at Prudential, can you comment to bet on how blenders have been behaving? Are local producers still feeding blenders?

Njombo is blender specialist.

I think there's 2 aspects to it. The first one is that after the express day that we did last year in terms of the quality and putting pressure on improving quality, there has been a better behavior in terms of the blenders. And there is some blenders that actually adhere to the quality requirements, which has actually picked up their cost of production which had an impact on their pricing. The second part is that as the pricing in the market starts to pick up from the manufacturers, the cost of OPC has gone up. And that has actually created some normality in terms of the pricing of a blended product, which is reducing the negative impact of private blenders in the market. And then lastly, the availability of expanders has been erratic in the market. And that and availability has had more impact on a blender than it did on a manufacturer. And that also helps in terms of managing to normalize the situation with regards to blenders.

We have another question from David Fraser at Peregrine Capital. Despite higher debt spreads, surely, given that will reference drops of 375 bps, you are still paying a lower interest rate than last year.

David, that would be accurate, yes. I was more referring to before and after the new facilities.

We have no further questions.

Thank you very much, Louise. Then I will thank everybody very much for their attention to this webcast. And this will be made available as well. And from my side, I will just hand over to Kwame. Thank you very much.

Thank you very much. And once again, thank you again for joining us, particularly at the short notice. If any questions -- if anybody has questions later on, please kindly e-mail it to us and we'll direct it to the responsible individuals and get back to you. I think that concludes our program for the day and enjoy the rest of your day, everyone, and cheers.