PPC Ltd (PPC) Earnings Call Transcript & Summary

Good morning, everyone. A very warm welcome, and thank you for joining myself, Matias Cardarelli, and members of the PPC executive team this morning. As an introduction, the executive team in the room includes Brenda Berlin, our Chief Financial Officer; Ernesto Acosta, our Chief Operations Officer; Paulo Marquez, our Chief Strategy Officer; Bheki Mthembu, our Chief Revenue Officer; and Kevin Ross, our Chief Legal and Compliance Officer. I would like to start by highlighting the context and key points relating to the very exciting announcement of ZAR 3 billion best-in-class integrated new cement plant in the Western Cape. After 6 months of hard and comprehensive internal analysis, we are very happy to be able to share this relevant milestone in PPC's long history with the market and the country as a whole. As I'm most sure most of you would have read the SENS announcement by now, the team and I will be able to answer your questions at the end. Last November, at our F1 '25 half results presentation, I shared with you the 3 pillars of our Awaken the Giant strategy, namely, addressing and fixing the gaps that we have identified in the company; the turnaround plan that we are already executing; and lastly, that we were looking at strategic opportunities and projects. This investment plan naturally is part of the last one, clearly enhancing PPC's competitive position in the years to come and consequently, bringing equally value to customers and shareholders. Following the signing of the strategic cooperation agreement with Sinoma Overseas in July last year, we have made progress on a number of initiatives that they are in the pipeline, but the construction of a new state-of-the-art integrated cement plant in the Western Cape, of course, is by far the most strategic and transformative one so far. This is an exciting undertaking between the leading cement producer in South Africa and the leading manufacturer of cement plants in the world. This investment is also key to remain ahead of changing market dynamics. As I have consistently emphasized for the past year, South Africa cement industry is undergoing rapid change and the competitive landscape will look significantly different soon. It has been a misunderstanding for years that the problem of overcapacity in the country should be assessed as if all plants in the countries were the same. They are not. Cement companies in the country, which are not in the position to heavily invest in new technology to replace their current very old and inefficient plants, will struggle to compete sustainably. It is important that we build stronger and more efficient PPC through our operational business turnaround but also through proper reinvestment to ensure our sustainability and value creation to shareholders in the years to come. This change in market dynamics urgently requires modern and cost-efficient asset and environmentally conscious cement produce. The new fully integrated plant can produce over 1.5 million tons of cement per year and will replace an increased existing capacity at our De Hoek and Riebeeck plants. It is planned to be constructed on Riebeeck side and so the key environmental approvals and mining rights have already been obtained. The new plant will have the latest technology, resulting in substantial improvements in energy efficiency, reduce coal consumption and lower emissions per ton of cement produced. We estimate that variable costs will be reduced by 20% to 25%, carbon emissions will drop by 30% and fixed costs will also decrease significantly by above 35%. This means producing the lowest carbon cement in South Africa at the most competitive price, driving both our profitability and sustainability. The plan to construct this new plant has not been taken lightly. Our internal assessment demonstrate robustly that the running of the new plant is significantly more value accretive to PPC comparing to running and maintaining the existing old technology that also would require CapEx to remain environmentally compliant, even at a scenario of no economy and infrastructure growth in the country. As most of you know, PPC already currently run the newest plant in the country, being Slurry Kiln 9 in the Northwest province, which serves the inland region. Jointly with our other relatively new Dwaalboom integrated plant and our grinding and plating facilities in Gauteng, PPC is positioned as the best company to sustainable supply -- to sustainable supply and support our customers in Gauteng, Northwest, Limpopo and Mpumalanga provinces. Now it's time to invest in the Southern region of the country, which has not seen a significant cement investment in more than 40 years. The construction of the new plant in the Western Cape will position PPC even more competitively countrywide for the benefit of its shareholders and customers. We are confident that the new plant investment can be funded from debt facility within its current 2x net-to-EBITDA covenant. It is important to note that the full ZAR 3 billion investment will not be required upfront as a milestone-based payment structure has been agreed with Sinoma. We will obviously continually evaluate liquidity to ensure PPC retains a strong and sustainable capital structure over the project period and beyond. Robust analysis to date give the management team and I the confidence that the new plants meet all PPC capital allocation criteria and the return on investment on this project will be greater than our WACC. The feasibility study for the plant have reached an advanced stage. However, over the next 3 months, the parties will now need to finalize the details of the project and the associated turnkey engineering procurement and contract EPC agreement. Subject to final Board approval, it is anticipated that the construction of the new plant will start in the second quarter of this year and will be commissioned by the end of calendar year 2026. The existing plant in the Western Cape will continue to operate during the construction and commissioning process, thereby providing funding support and a smooth transition. Thank you for being with us on such important day for PPC. We can now open the floor for questions.

Please, can you post your questions? We do have one question already. But if you have further questions, if I can ask you to post them. The first question is from Anthony Clark, and I know you've covered some of these points, but I think it's important that we just reiterate. In light of the overcapacity in the South African cement sector, how can an investment in a new ZAR 3 billion cement plant and the associated CapEx and costs of other plant closures be good for PPC?

Anthony, how are you? Happy New Year for you. Thank you for always being so active in the sector and with PPC. Respectfully, Anthony, I think that has been a misunderstanding for years already in the country, evaluating the problem of the overcapacity in the country. Partially, I think that this is -- the reason of this is that the cement leaders in the country has misguide public in terms of how to address the overcapacity problem in the country. When we talk about overcapacity and we understand by that, that all the plants and all the capacity in the country is the same. That is a big mistake. It's not the same to run a 40 years old plant, very inefficient, than to run a 10 years old plant, a 5 years old plant and, of course, not the same to run this new state-of-the-art plant that we are going to build. So the problem of overcapacity could not be assessed like all capacity is the same and all plants are the same than new plants. Because the variable cost and the fixed cost of producing in an old inefficient plant is not the same than producing in a new modern plant. During the last half result announcement, someone asked me if we should be concerned about West China Dugongo plant in Mozambique. If old capacity would be the same, why should be anyone in South Africa concerned? But the question was a good question because Dugongo was China plant in Mozambique produce cement at a variable cost around $25 to $30. While some cement producers in the country produce cement, their variable cost probably is close to the double of that. So Anthony, I think it's very important, in my view and respectfully, that we start to understand that the cement environment in South Africa and in the region is changing. Chinese new players are coming and they are bringing the latest technology to the region. Those plants are going to be run in a very low-cost and efficient way. So personally, I believe that could be a mistake to complete -- continue comparing old capacity with new efficient capacity. So what I'm trying to say here, and I have just mentioned it, companies in South Africa and in the region who are not ready to invest, who does not have a healthy debt balance sheet, they are going to struggle. Cement is a cost business, first of all. So if you are going to produce your ton of cement at half of the cost of a competitor, this is not a same capacity problem. I would say the contrary. It's is a huge competitive advantage for the ones who are going to be able to produce low-cost cement and being environmental conscious as well. So Anthony, thank you very much for your question or your question, but I do believe that -- and I have been saying this for already more than 1 year. I kindly suggest analysts and investors to start to try to dig deeper and to understand what is happening in the market and how competitive in terms of cost the South African market will be moving forward. Thank you very much.

Thank you. We have a number of questions, and I'm going to just read them off. I'll take them one by one.

Please.

Can you elaborate a bit more on the rapid change you see coming for the industry? That's from Ielhaam Ismail at M&G Investments.

Yes. I think I have just addressed it. I mean, the whole reason is Chinese investment coming, which are bringing new technology and most efficient plants. The new competitors in the region are going to operate, like happening in most of the markets around the world in cement, that the most efficient cost companies are the ones who are going to prevail. And the ones who are not able to manage costs, because they have old assets or inefficient teams, are going to struggle. So this is what is coming already in the market. And this is what I think that the narrative regarding the cement business in the country for the past year has been misguided. The reason why we are making this move, it is -- of course, it is an offensive one in terms of that we are looking to, by bringing new technology to the Western Cape, Northern Cape and Eastern Cape region, we are looking at expanding our footprint and regaining market share by being able to deliver to our customers, by far, the most competitive value proposition in the sector. But also it's a defensive move, because as all-timer cement executives are looking now around the table, probably the more than 60 years -- or no, sorry, 80 years experienced cement around this table now, we have able to see what was coming and preparing PPC for that different competitive environment that is already starting in the country and in the region.

Next question is from Luke Bredeveldt at Primaresearch. Team, what is the [ LOM ] of the existing lime source in the Western Cape? And will a new lime mine be secured to supply the new plant?

Ernesto, please, you can take that.

Good afternoon. Thank you for the question. Our existing and current deposit -- limestone deposit in Riebeeck plant will allow us for more than 8 years of the current life of mine to serve the new plant that is under Board approval. Yes.

So Luke, I take opportunity to also to say Happy New Year to you. I think we have more than limestone needed for quite a very long time.

Next question is from M&G from Ielhaam again. Can you comment on the age of the 2 plants that will be shut down?

The age of the plants? Those plants have -- one has 60 years old and the other one has 40 years old.

Next question from Dylan Griffiths at Foord Asset Management. Could we get an indication as to how much of the 1.5 megatons is -- 1.5 million tons is new or expansion supply and what is replacement volume?

Well, I think in terms of capacity, it's a replacement. The current 2 old plants could produce approximately 1.4 million tons, between 1.4 million and 1.5 million tons. They are able technically to produce that by running 3 clinker kilns and 4 cement mills. With the new plant, we were looking at running only 1 kiln, 1 cement. And depending on our -- with our product mix, we will be able to produce 1.5 million to 1.7 million tons of cement per year. In terms of market, so actual production, we are nowadays around a little bit more than 1 million tons of cement produced in the Southern region of the country. And we strongly believe that, again, by this very distinctive value proposition that we'll be able to offer to the customers relatively soon, we were able to recover market share that PPC has been losing for many years, and we were able to improve -- push our volumes close to the plant capacity after some time.

The next question is from Peter Cromberge at Mergemarket. Could you please outline potential funding structures for the new plant? Will PPC raise new debt or use existing or undrawn facilities?

Brenda?

I'll take that. Peter, the funding structure, our very, very strong preference is to do the following. We will use debt. We will -- we don't intend to use equity. Our share price is undervalued, and it is the most expensive form of equity. We believe that debt facilities -- we have sufficient capacity in debt facilities given our EBITDA to be able to increase those facilities very easily and maintain the 2x covenant net debt-to-EBITDA. So it will be debt funded at that conservative level of gearing.

Thanks. Brenda, while we're with you, I've got another question that specifically being asked of you from Luke at Prima again. I don't know if you've run the numbers yet, but will the dividend or dividend policy be affected by the construction of the new plant, i.e., will the Zim dividend be used to service debt? Or do you forecast sufficient cash flow to continue to pay the pass-through dividend?

Luke, we have run the numbers. And suffice to say, we're very confident in the outcome, but we do need to fine-tune over the next 3 months as the technical guys complete their work as well. The -- we don't intend to change our dividend policy. However, to maintain the flow-through of the Zim dividend, and we have appetite to do that, we'll entail an internal policy change of increasing our target debt level relative to EBITDA. As you remember, it's currently between 1.3 to 1.5x, and management and the Board will consider increasing that to enable dividends to be maintained through the construction and commissioning process.

The next question is from Andrew Bishop at Excelsior Capital. Why did you choose the Riebeeck site relative to De Hoek?

Well, the easy question is because the limestone quality at Riebeeck is much better than De Hoek. And also, we have much long reserves there than in De Hoek.

The next question from Ielhaam at M&G. Would you be able to comment on competitive dynamics in the Western Cape? Is this an area that has been competitive and where you lost market share in recent years?

Probably the Western Cape is not as competitive as Mpumalanga because most of the investment done by PPC in 2019 and around 2012-'13 from Mamba and Shibaku have all been done in what we call the inland region. So the Western Cape has been less competitive. Of course, we see a couple of local competitors bringing cement there but from long distance, from plants that they are really far from the Western Cape. And we have seen the importers coming from Vietnam also to the Western Cape. Finally, we have a cement producer, [indiscernible] station, not an integrated plant, who produce cement by importing cement from the Port Elizabeth plant and they bring some cement to the Western Cape. So this would be more or less the current analysis of the competitiveness in the Western Cape. And as I mentioned, we are 100% confident that by running this new very, very efficient and low-cost plant, we were able to bring to our customers in the Western Cape, Eastern Cape and Northern Cape an unbeatable value proposition moving forward.