Sephaku Holdings Limited (SEP.JO) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Sephaku Holdings Limited's Interim Results Presentation. [Operator Instructions] Please note that this conference is being recorded. I'd now like to hand the conference over to the Investor Relations Officer, Sakhile Ndlovu. Please go ahead, ma'am.

Thank you, Judith, and good morning, everyone. Thank you very much for participating in today's interim results call. To take us through the presentation is our Sephaku Holdings CEO, Neil Crafford-Lazarus, who will be joined by Sephaku Cement CEO, Pieter Fourie; and Métier CEO, Kenneth Capes for the question and answer. The interim results presentation is available on the homepage of our website. However, if you are unable to download, you please don't hesitate to send me an e-mail to [email protected], and I'll forward it through to you as soon as possible. At this point, I'd like to hand over to Neil to proceed with the presentation. Over to you, Neil.

Thank you very much, Sakhile, and good morning, ladies and gentlemen, and welcome to this interim financial results presentation of Sephaku Holdings for the period ended 30 September 2020. I will be running through the presentation. Please, at your own leisure, have a look at the first slide with the disclaimer on it. I'm not going to spend any time on that. I'll go straight to the agenda. We, first of all, going to have a look at the financial overview and operational overview and then an outlook. There's also appendices under Section 4 of the agenda, that is just for your own reference. If you need any more information on the debt scenario, how it was actually came about and what the current position is, we've got some slides setting that out for the guys that does not seen or heard the story before. There's also a cost breakdown for cement in that appendices. Moving on to Slide 3, the financial salient points. Yes, the pandemic lockdown impacted profitability. We saw in Métier mixed concrete. Sales revenue was down ZAR 135 million, the first half 2020, so ZAR 425.8 million of sales revenue and that went down to ZAR 291 million for the current year. However, the very next line, the EBITDA margin went up by 2.4% due to a very quick reaction from the team on cutting costs and reducing fees and maximizing every possible cost-cutting exercise. So EBITDA for the 6 months period ZAR 27.4 million as opposed to ZAR 29.9 million in the previous year. EBIT is ZAR 15.9 million at 5.5%. And the net profit after tax for mid-year was ZAR 7.5 million compared to the ZAR 7.7 million in the corresponding period for 2019. Sales revenue for Sephaku Cement ZAR 883 million as opposed to a first half 2019 of ZAR 996 million, also down by ZAR 710 million. The EBITDA margin of 6.8% or at ZAR 60 million. That is mainly due to the fact that during lockdown 5, we were completely locked down and no production, no sales took place during that period. And then during the subsequent period of lockdown level 4, we were operating at 50% of capacity. That impacted those results severely and the reason for those numbers, therefore. EBIT for the margin was 0 at a loss of ZAR 1 million for the 6-month period. And the net loss after tax was ZAR 83.7 million compared to the loss of ZAR 81 million (sic) [ ZAR 21 million ] in the previous year for that 6-month period. That ZAR 83.7 million translated to a ZAR 30.1 million equity loss that we accounted for in Sephaku Holdings as opposed to the ZAR 7.8 million that we showed in the previous year. The net loss after tax for the group is ZAR 29.6 million, indicating that there was a set off of the mid-year profit and the head office listing cost and then maintaining that portion. Basic loss per share were 11.65% and headline loss per share 13.47% mainly due to sales of the fleet that would impact on that line of reporting. Moving on to Slide 4. The sales volume recovery post lockdown supported SepCem's earnings. Let's just first have a look at Métier for the first 6 months. Revenue 32% lower, 33% decrease in concrete sales volume. Increase in operating margin from 4% to 5.5% due to a reduction in expenses and income from the sale of assets. Volumes had normalized by the end of the interim period, but demand continues to be muted due to the low construction activity. It's not exactly the same that we've seen in cement, where we saw a high demand for cement in the last 3 months of the last 4 months. But as you also know, cement is a subsidiary of DCP. And therefore, we report on them only for the first 6 months of the year, which was substantially muted due to the activities during that period, and we only saw the recovery in the post reporting period, i.e., in the third quarter, numbers looked substantially different. Revenue 11% lower year-on-year due to the sales volume decrease of 8.5%. That was mainly which we saw an extension of the previous year in the first quarter ending March 2020. And then, of course, the impact of COVID lockdown of April and a softer lockdown during May. The impact of the lower priced Falcon brand was also, of course, not comparable in the first half of 2019. Sephaku Cement implemented price increases of 5% to 9% in January and February 2020 for bulk and bagged cement, respectively. Increases in bulk prices held, but bagged prices were discounted due to intense competition. Bulk volumes recovery after the lockdown was at a slower rate, thereby impacting the revenue mix and that's why you're able to see that, that it doesn't quite make sense if you're looking at the revenue reduction and the price increase still showing the movement in turnover that we experienced. On the Sephold side, head office expenses decreased by 8% year-on-year to ZAR 6.9 million from a previous ZAR 7.6 million, mainly due to COVID-19-related reduction in remuneration. Moving on to Slide 5 and looking at the cash flow from the group, this, of course, excludes cement, which is only equity accounted. Started with just below ZAR 5 million, generated nearly ZAR 11 million through operations. Interest income was negligible. Finance costs of ZAR 8.2 million. And the net CapEx inflow. 2 items in there, the sale of assets, trucks, mainly ZAR 8.2 million and the Midrand head office that we entered into a sale and leaseback transaction with of ZAR 18.5 million. So that was a ZAR 26.7 million income and then limited outflows of CapEx showing a net inflow of ZAR 24.5 million. We contributed ZAR 15 million of that towards the Métier debt, which was of ZAR 92 million at year-end. We've reduced that to ZAR 75 million, which was a requirement from the banks to just balance the EBITDA that we've seen over the last 2 years with the outstanding debt. Having done that, we were able to, after that, negotiate the repayment of the remaining ZAR 75 million under very favorable terms we think, and we are only paying interest until the end of the year. As from January, we'll be paying interest and capital ZAR 1.85 million per month, which compared to the ZAR 3.326 million that we've been paying previously is quite a reduction in the core of debt service requirements. And this will continue at ZAR 1.85 million until March of 2023, when the outstanding balance would be ZAR 45 million. So that's the profile for the next 2 years. We ended the year with a cash balance of just -- as in after -- up to 6 months, the cash balance which is below ZAR 10 million. If we look at Slide 6, it just shows how Métier has reduced debt. I think it's a story that the regulars have heard over and over. We have been concentrating on debt repayment in both operations over the last 3 years. And we're seeing Métier debt coming down from the ZAR 270 million to ZAR 75 million. And as I said, going down to ZAR 45 million over the next 2 years. The renegotiation and the reduction of the debt to the ZAR 75 million did come at a cost. Our current debt service cost -- the debt cost is JIBAR plus 5.25%. That comes down as the EBITDA improves, but it is ZAR 125 million more than what we were previously paying, which was JIBAR plus ZAR 400 million. But of course, fortunately, on the flip side, we've seen the repo rate come down by ZAR 300 million. So on balance, we are still paying 1.5% less than what our debt service cost was a year ago. Looking at the cement side, cement we repaid over ZAR 1 billion towards the EBIT. The ZAR 2.4 billion is quite -- currently sitting at ZAR 1.03 billion. But there is now ZAR 125 million that is owing to the other shareholder Dangote Cement PLC. They have made a contribution similar to this ZAR 15 million that was required for mid-year. The banks also required a shareholder contribution of ZAR 125 million on the cement side, in order to, again, reach a scenario there with cement is also only paying interest until the end of the year and then repaying this ZAR 1,030 million over the next 3 years, and that breakdown is also in the appendices, if you're looking for more information on that. Operational overview, overshadowed by COVID and recovering from that. Restructuring and reduction of expenses were prioritized. Cost-saving initiatives included lower transport costs by 5% by enhancing utilization and reducing the fleet. Cancellation of CapEx for current year as well as limited CapEx introduced for next year and then reducing of compensation cost by 6%. There were no bonuses and no increases during this period. Savings enabled Métier to fulfill its bank debt commitments in spite of the significant reduction in sales volume due to the lockdown, and implementation of strict health and safety protocols has limited the employee exposure to COVID-19 virus and potential downtime, and we continue to operate in this mode. On the cement side, also a revised CapEx plan by canceling or postponing projects. Optimized operational processes, such as power consumption, plant reliability and outputs. SepCem applied the principle of no work, no pay during lockdown. Bonuses were reduced and other employees financial benefits. Salary increases were frozen until December 2020. Some of the work -- no work, no pay scenarios were -- did benefit from the dues payments, so it wasn't a complete no payment scenario, and we also during the 50% employment or activity period under lockdown 4 that updated the staff so that everybody had the opportunity to work 50% of the time. The cement pricing slide, we've changed that one a little bit to move the index point to the fourth quarter of 2019, which was the point where we really had our average price, our bagged price and our bulk price, all in the same level. Just showing more, I think, how the gap was closed, which was created in 2015, 2016, when Mamba entered the bulk market and that price went down substantially. Over period, it came -- over the period, it came back. And since the beginning of this year, we've seen that the bulk prices has improved more rapidly than the bagged prices, but it's not as a bigger gap is as it would have been if we kept the index write-back the beginning of 2017. So hopefully, it's note that gives you more insight to specifically how the movement in pricing has been. Slide 12. The [ hi-tech process ] is still continuing, and we are still awaiting an answer and a ruling from that. And we have seen imports come back in the third quarter of 2020. As you've see in the last bullet as well, end of September 2020, 713,000 tonnes have been imported, which is a 4% increase year-on-year and approximately 92% of the imports came from Vietnam and 71% imported through Durban, which is also where we have our Falcon brand competing. We move to Slide 13. This is now post period for cement but still within a period that we really reported on, but we will only reflect on this in our full year results. The third quarter saw revenue of ZAR 792 million, which was a 35% increase year-on-year. The third quarter EBITDA margin of 19.4% compared to the 18.9% of Q3 2019 due to increased volumes. And the net profit after tax in the third quarter was ZAR 64.5 million, supposed to the ZAR 4.8 million loss that we saw last year. The quarter that last year included our [indiscernible] stock so that normally depresses the results a little bit. So it's not a complete like-for-like comparison, but still a substantial improvement for the third quarter and the current year as opposed to last year and the current year and the current 9 months, [indiscernible] stock was in the first quarter of this year. Comparative revenue for the 9 months ended September 2017 was ZAR 1.7 billion, an increase of 6% year-on-year. The outlook, slide 15. Constrained trading environment to continue. Cautiously optimistic about demand. GDP growth forecasts revised downwards, implying a tough operating environment for the next 12 to 18 months, but we have seen unprecedented bagged cement demand from May. As you've seen in our third quarter results, we are not sure what the longevity of this really is. Government planned infrastructure program can provide significant impetus for building materials in the medium term if implemented. And yes, we are seeing some awards of the projects. Hopefully, all of them will be coming through and then things will be looking at going forward. In the meantime, we will continue to focus on reducing the debts just 2 years to go on both of these to get it to probably corporate debt scenarios going forward, and there will be continued vigilance on cost control. Ladies and gentlemen, that takes care of the presentation that I'm going to speak to. As I said, there are appendices for those of you that require more information on cement cost breakdown as well as history on the 2 debt scenarios. And I think we are ready to move straight into questions.

[Operator Instructions] So we don't seem to have any questions on the lines. My apologies. We've got a question that's just come in. It's from Charles Boles of Titanium Capital.

A couple of questions, if I may. You talk in your results about the blender activity that says it was severely hampered by the shortage of extenders in May and June. And maybe just give some background to that? And how long you see that persisting? And what's happened to blender activity subsequent to that?

Pieter, do you want to take that?

Yes, I will. Thanks, Charles. We have seen some conditions at Eskom that limited the supply of ash during the period, specifically May and June, but it did continue beyond that as well. So it's still under pressure. We've also seen a reduction in March and April slag production. So overall, that does still continue to limit the supply from blenders. And then 1 last fact that happened in the last quarter is one of the competitors that have supplied quite a lot of the bulk cement to blenders ran into some production problems or extended production problems, which also reduced some volumes. So some of the additional volumes that we found in the market certainly came from the market that was at higher levels, but it was also as a result of the reduction of blender activity. We certainly think it will come back again. But in the short-term future, just with the way Eskom is operating, I don't see that happening very quickly.

And just to be clear, is that Eskom on a planned maintenance? Is that Eskom on unplanned outages that's generating plant issues? Or what's the cause there?

The main cause is planned maintenance. Eskom isn't intensified the maintenance program. And I think they've published some information about that. It's taking units off much more often to do maintenance on them. And certainly, ash has been affecting the consequence of bringing down the units.

Got you. I don't know if this is a Neil or Kenneth question. I'm a little surprised. I see -- saw trucks where you got proceeds of ZAR 8.2 million and seem to have generated profits of ZAR 6.5 million from the sale of trucks in Métier. I'm just curious who was buying trucks, I would have thought as an industry, given activity levels, there probably would have been a surplus of [indiscernible] rand. Maybe if you can just clarify how you generated that level of profit?

Thanks. So the first thing is that we sold, I think, was 17 vehicles in total. And we actually already made that decision kind of on the 1st of April. So I've got stuck in immediately trying to offload before anybody got scared and started not to buy vehicles. And of the 17 vehicles, I think we had something like 11 buyers. So it was no one specific. It was spread around 1 vehicle, 2 vehicles here and there. And I assume that they just took it on because of the -- their own replacement schedules, I didn't actually ask them. So I'm not 100% sure why they took them on. But for us, it was a matter of we're really -- we're not utilizing our fleet properly. And I think the fact that we sold and we're now saving a significant amount on transport just because we're getting property utilization out of our fleet.

And Kenneth, that's not in and out in the sense that you've sold it to guys that you'll subcontract to or pay them higher prices in future to recover their costs. So was it a genuine third-party sale?

Yes. That's correct. We actually reduced the fleet by 17 vehicles. So we had a couple of vehicles which we sold to some of our subcontractors. So they stayed with the fleet, but we're actually -- the sale of those particular vehicles were 17 vehicles out of the fleet altogether.

Got you. And Neil, just maybe 1 last question. Your trade and payables picked up quite significantly to ZAR 108 million, that's off ZAR 90 million last year. And I'm thinking that your activity levels are lower. I'm assuming some of your suppliers gave you extended credit to permit that? Or was there something else that drives that?

Charles, no. I think we probably just looking at March -- you comparing to the year-end number, right? You're not comparing to a year ago?

I'm comparing to a year ago.

Oh, year ago. So...

So in September -- I mean, March number is much lower. You said last year in September, it was ZAR 90 million by March, it goes down to ZAR 72 million. So I imagine there's some seasonality in that. So comparing it year-on-year, it goes from ZAR 90 million to ZAR 108 million. And with the low level activity, you -- was that agreed in terms of extension with suppliers? Or -- yes, just trying to understand how that took place.

And Charles, not intentionally, I'm trying to also just at the moment not seeing the picture clear in my mind exactly as to where the year-end was, because often, it is a matter of how quick debtors comes in as well because we're trying to balance what you have available on overdraft, what you can pay out and not. And I think it might have just been the timing of the cash flow at that point in time. I know that we've gone through that in the sense that the last month all creditors were paid before close of the month. That might have been in a month leading to this recovery, that 1 or 2 creditors were paid 1, 2 days late, but nothing more than that. And as I said, that has come out in the [indiscernible].

So just to be clear, something, you're settling creditors on due terms now. You're not extending creditors to try and fund the business?

No, absolutely. As I said, the last month, we cannot pay everything before close off of business, now debtors coming in to pay all the creditors before month end. And if there was a management of the cash flow prior -- previously, it would have been for 1 or 2 days, 1 or 2 creditors. But it's not -- it's something behind us.

[Operator Instructions] We have a follow-up question from Charles Boles of Titanium Capital.

Sorry, guys. No 1 else is asking. I'll ask. Neil, I've asked this before, but is there any reason you couldn't change the year-end of Sephaku Holdings to match that of SepCem?

Charles, not really. And that is something that we are considering from time to time. Again, I mean, I was looking at it probably during the last months as well. I think to date, it has worked for us because we have 2 different sets of auditors. And it just makes sense to have a time set of financials from cement that we bring in as a 1 line equity which our auditors can just review the files when trying to do both of them at the same time, unless you have the same auditor, which would also make that different. But yes, we -- it's not something that's causing concrete, but it's not something that we also feel we have to do in the current year.