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

Good day, ladies and gentlemen, and welcome to the Sephaku FY 2021 presentation. [Operator Instructions] Please note that this call is being recorded. I would now like to hand the conference over to Sakhile Ndlovu. Please go ahead, ma'am.

Thank you, Irene, and welcome you all to the SepHold FY 2021 Results Conference Call. To take us through the presentation of the results is Sephaku Holdings CEO, Neil Crafford-Lazarus; and he's going to be joined by Duan Classen, the acting CEO for Sephaku Cement; and Kenneth Capes, the CEO for Métier, straight after he gives us the presentation. For those of you who don't yet have the presentation, it has been uploaded on the website, you can go into our website at www.sephakuholdings.com. You should be able to find it on the Home page. However, if you're not able to download it, please do not hesitate to send me an e-mail ASAP at [email protected] and I'll forward it to you as soon as possible. I'll hand over to Neil now to proceed with the presentation.

Thank you very much, Sakhile, and good morning to everybody on the call. Yes, this is the presentation on the financial results that we released yesterday afternoon. You would have seen both sales announcements as well as the financial statements on our website. We will be having a look at the financial review. We've got notes on the COVID-19 impact. I'm not going to spend a lot of time on that, just probably a reference for your own information. If you had any questions on that, look at the operational review up and then there's appendices for any newcomers to the company that might want some additional information with regards to location and operations and so on. You'll find that in the appendices. I'm not going to look at that during this presentation either. The normal disclosure that you could also go through at your leisure and then the financial review. The group showed a net profit of ZAR 19.9 million after tax compared to the loss of ZAR 17.4 million from the previous year, mainly because of the turnaround that we saw in midyear throughout the year and cement having a very good second half after the lockdown 4 phase. Specifically, I think from lockdown 3 onwards the last 6 months, sales volumes picked up, and you'll see that in the results. So the earnings per share ZAR 0.078 as opposed to a loss of ZAR 0.082, HEPS of ZAR 0.06 as opposed to a loss of ZAR 0.08 and then the SepCem's focusing in equity accounted earnings of ZAR 16 million for the current year compared to the ZAR 0.5 million that the earnings was the previous year. On the Métier side, we did see a reduction in turnover. We've had 2 months in Métier, which -- a little bit more than that, but no activity at Métier during lockdown 5 and 4. So sales revenue of ZAR 634 million as opposed to ZAR 727 million. The EBITDA was ZAR 55 million for the period compared to ZAR 34 million of the previous period, but that would then indicate that the majority of this is in savings or all of it is in savings as these are reductions on the turnover side. The EBITDA margin of 8.7% as opposed to 4.8% the previous year, and EBIT 5.2% at ZAR 33 million. The net profit after tax for Métier was ZAR 16.6 million compared to the loss of ZAR 0.5 million a year earlier. On the cement side, we saw revenue of ZAR 2.4 billion as opposed to the ZAR 2.2 billion in the previous year. EBITDA of ZAR 382 million, up from the ZAR 360 million the year before and a margin of 16%, down from 16.4%, mainly here because of the lockdown, of course. Whilst the turnover was up for the year, you never really recovered the overheads of a full month of no sales, and that distorts the numbers on the cost side. So a reduction in EBITDA over there down to 16%. The EBIT margin of 9% at ZAR 220 million and a net profit after tax of ZAR 44.4 million compared to the ZAR 1.3 million the year before. The net profit of the group increased by ZAR 37.3 million in the comparative period from the '17 to '19. And Métier turnaround process resulted in increased earnings, sustainable lower cost, income from disposal of underutilized assets. One of the first things that came up, the main focus when we rejoined on the 1st of April was the utilization of the fleet. We reduced the fleet, but managed to improve also the return of the service providers as their assets that they had working for us were much better utilized and a win-win situation on both sides. The EBITDA and EBIT both improved by about ZAR 21 million compared to the previous year. On the cement side, equity accounting profit increased by ZAR 15.4 million, a 9% increase in sales and a 10% savings through the COVID-19-related cost reductions initiatives. Again there, we'll get back to that, there was temporary salary reductions in CapEx, some things were permanent, some things were temporary, just to get us through that period, but all contributed in bringing good results for us at the end of the period. On the Sephaku Holdings side, ZAR 4 million decrease in expenses. We'll have a look at that trend shortly as well. So with regard to cash flows, cash generated by the operations increased by ZAR 13 million. We only had a ZAR 34 million cash generated last year that went up to ZAR 47 million this year. The expenses are there to be seen and not a lot of CapEx finance costs. Proceeds from assets has 2 main groups. The one is the Midrand property that we sold for ZAR 18.5 million and the underutilized transport assets that I referred to already in the previous slide of ZAR 8.8 million. For those of you who're looking at the financial statements, specifically balance sheet in more detail, you'll see that a newcomer to those lines are loans. The sale of these assets was in the finance and then most of the owners are buying the assets over the 3-year period. So there's also a short-term and a long-term portion of these loans, which will be new on the balance sheet. But good payers, money is coming in and -- from operations, of course, services that they're providing to us. Net outflow in finance activity constituting ZAR 22 million repayment of bank loans and ZAR 16 million to lease payments. On the Sephaku cement side, they started the year with a ZAR 500 million cash in the bank, generated ZAR 328 million from operations. Net financing cost, ZAR 99 million. The interest paid was actually ZAR 110 million, but there's also interest received on the cash in bank, of course. So that is when we refer to a ZAR 450 million payment later that would be the ZAR 110 million plus ZAR 340 million payment of bank debt that you see just 2 columns worth. Sorry, I'm on Slide 7 for those who was following the presentation, I basically phased through the first couple without communicating what -- which slide I'm on, but I am on Slide 7 at the moment. Proceeds from capital injection. You will recall that also when COVID really struck, and we had no production and substantial overheads during that period, the banks required a capital injection before they were willing to entertain relief for the third and fourth quarter payments from cement. That resulted in a ZAR 125 million injection from DCP, which the shareholders agreed will be treated as a loan and will not be an equity injection. So strictly speaking, that was just equity moving from the banks to the shareholder and not a reduction of the loan with regard to that specific ZAR 125 million, but we'll come back to that number well, again. Overall, the year ended on a ZAR 480 million of cash on the cement side. Looking at costs. As I've mentioned, Sephaku Holdings has peaked on ZAR 25 million in financial year 2018. As we said, we're bringing it down every year with a ZAR 4 million reduction. In the current year again as well, you'll see that basically 1/5 of the expenses were normally noncash items portion being the nontangible from the acquisition of Métier. There's around ZAR 38 million in that we [indiscernible] over a 5-year period. And then the balance is purely Black Scholes vesting costs on the option schemes that is also completing next year. I think we've done all the vestings now, so that's why that number is getting smaller and smaller. But I think important one is the cash portion of our head office cost. That has come from the ZAR 20 million to be ZAR 11.8 million or ZAR 11.7 million over the last 4 years. Also something that we are always asked to comment on or just give information on for those of you needing confirmation on your models with regards to the split. We present the split of costs for cement for the calendar year of 2020, included in our financial year of 2021. That was Slide #9. Moving on to Slide 10. Métier loan reduced by 24%. We started the year at ZAR 93 million there. And again, it was agreed that they received a payment holiday on the capital for the year, provided that we made a ZAR 15 million equity contribution or contribution from shareholders. That happened in August with the ZAR 90 million loan reduced to ZAR 75 million in broad terms and further repayments that started in January to March has reduced the loan now to ZAR 71 million. There is still 2 years to go after that. We have a final settlement of ZAR 45 million in March of 2023. Cost of the loan was at the time when we negotiated the debt relief on capital payments for 2020 calendar year, it was JIBAR plus 5.25%, it went down to 5% at year-end, and it will go down to 4.7% now in June as our EBITDA to debt has improved substantially during this period. So there's been a reduction at every major point. The focus of main debt original capitalized amount was ZAR 2.4 million (sic) [ ZAR 2.4 billion ] in December 2015, that is down to ZAR 1 billion at 31st of December 2020. But as I just mentioned, the ZAR 125 million that's attributed to shareholders. So the total of ZAR 2.4 billion based out actually at -- there would have been ZAR 125 million outstanding. That ZAR 1 billion has in the meantime gone down to below ZAR 900 million. We made a payment of ZAR 60 million in February and payment of ZAR 60 million in May. So we have ZAR 900 million left on that loan. But other than that, we would have commitment or similar commitments to shareholders, the ZAR 125 million advanced during last year, and of course, the original standby facility when we increased the capacity of the plant from the 5,000 to 6,000 tonnes per day kiln. That amount outstanding is ZAR 528 million and attracts interest at a 3-month JIBAR plus 4%. I'm now at the COVID slide, Slide 13, where I said I was not really going to spend time on. It's purely a matter of giving indications of what the impact was and how we dealt with it for anybody that is interested in it. How we dealt with that and then what really was impacted during the period that we faced the lockdowns and even subsequent to that with demand and then that specific tender being slow to get off the ground as well. Moving on to Slide 14, the savings. I think this again refers mainly to lockdown 5 and 4 levels where on the Métier side, executive management and employee salaries reduced up to 50% from April to June. Just as part of the turnaround strategy, we have reduced compensation costs by 6% in any case and reduced transport costs by 5%. As I said, just much better utilization, so that the service -- all the suppliers of the services are still getting a positive result from the chains, limited CapEx to maintenance and fixed cost reduction was a key focus area during this period. On the cement side, again, the CapEx was also revised heavily, canceling or postponing projects that wasn't essential for the day-to-day operations being able to continue. Optimized operational processes such as power consumption, revised overhead expenditure and SepCem applied the principle of no work, no pay during the lockdown period. We also reduced bonuses during that period and salary increases were frozen in -- on the 1st of July. We did award those increases on the 1st of January, 6 months later, because it was also part of a longer-term agreement as to what increases would be given over a period of time. And during the period of no work, no pay, of course, income was supplemented by cash funding that we did acquire and passed through to all the employees that did forgo any money during that no work, no pay scenario of lockdown 5. Specifically for cement during lockdown 4, we were working at 50% of capacity and everybody was able to at least work during that period. Moving on to the operational review. Slide 16 on the Métier side. Again, the main focus for us in this period of 4 years of a downturn forming in [ construction industry resulting in same for ] building and construction material companies is continue to reduce the debt. And we've done that by another 23%, so we're sitting at ZAR 71 million. There, we've also thought that during the year, we would look at expansion of the market, and we have identified the Western Cape as an expansion opportunity, and we are in the process of establishing a site there and will be in operation in the Western Cape in quarter -- in Q3. The other area that our focus for the '21 financial year was just to enhance customer focus to accurately understand their needs and deliver an enduring experience. That is something that we've been doing on and has been the same with the Métier. And the fact that they could supply a very custom-specific solution, the concrete needs that everybody had. On cement side, the focus areas for 2021 was again the reduction of debt. And as we've mentioned, that will be -- the project debt came down to ZAR 1.17 billion and then ZAR 125 million was moved to shareholders, so we're close to ZAR 1.30 billion at year-end. Cost control was applied during the year, achieved a 10% savings by implementing all the initiatives to negate the impact of the lockdown. With regards to the social and labor plan, finalization of that was a focus area, that is still continuing to make progress, although not as quick as we would want to, but we are all comfortable that essentially we will get there. And then with the alternative fuels, also good progress we've made there. And also a project with a thermal substitution rate improvement is continuing. Also a question that -- or a graph that we show regularly on our presentations because it is a question that always comes up is what was the impact of imports. And we'll see from here that on Slide 18, the green line, that is the 2020 line did fall off during the first period, the April-May period, nothing that come in, whilst in February, it overtook the 2019 numbers, stayed flat for 2 months, but then started moving up again. And then I think in September, when we saw just the anticipation of the strengthening rand, quite a lot of stock came in. And with the result that there was only a ZAR 50,000 (sic) [ 50,000 tonnes ] difference in 2019 being higher than 2020. And you'll see from 2021 dotted line that also took off at speed. And the ITAC ruling remains an important one to be put to bed as soon as possible and not really see any further protracted deliberations with regarding to implementation of restrictions on imports. We always give some feedback on the first quarter of the calendar year for cement as well as their financial year ends in December due to the fact that they're a subsidiary of DCP, and we record up to March. And we always have the first quarter available again. Revenue increased 16% to ZAR 541 million year-on-year, of which sales volumes was really a 6% increase and price increases 6% to 8%. Of course, the mix will give you the 16% that we're reporting on. On the other hand, and it's always the first quarter, result is always impacted by that, and the Q1 profitability was impacted by the scheduled annual kiln stop for the maintenance shutdown,. It was down for the whole of February. And that had added complication, the fact that we had a very, very good second half of last year. Demand was so high that we were not able to stop our clinker for the period, which the kiln would have been down. We were really selling cement as fast as we could produce it during the second half of 2020, resulting in an insufficient stockpiles of clinker during the period that we had the kiln shutdown and that required buying of clinker, of course, at an additional cost, which has an impact on the comparable to the previous year. But overall, a good start to the year with regards to volumes and normal first quarter type results from that. Looking at the outlook, the residential building expected to remain in the subsector of growth through 2021. The immediate demand stimulus effect of cheaper mortgages expected to subside in the absence of improved production levels. Our group focus will still be the reduction of debt for both companies, to continue the pace for cost control and then, of course, Métier's expansion into the Western Cape. Ladies and gentlemen, that takes care of the presentation of the results that was published yesterday afternoon, and we can open the floor for questions.

[Operator Instructions] Our first question is from Charles Boles of Titanium Capital.

Good job on cost control. I had a couple of questions, so we could maybe take them one at a time. The first one is just to understand the leases, I understand originally you sold your Midrand property and you did a sale and leaseback of a period of time for that. When you sell the kits to contractors, is that on fixed leases back? Or is that just contracted in on volumes delivered? Or how does that work?

Charles, as far as lease is concerned, that was straight, although not an official sale and leaseback because we own the property and Métier leased from us. So they continue to lease this with a new owner, but that was the principle there of the sale of a building with a continued lease commitment from the Métier side. The vehicles, I'll let Kenneth just give you some color on that one.

Thanks, Neil. Essentially, with the fleet, we actually reduced the fleet first of all about 13% to be able to get the efficiencies up. And then we had a couple of vehicles that we sold to our existing subcontractors, which was already prior to COVID, a deal that my predecessor had already signed. So effectively, what we did was we reduced our own fleet, which has ended up being that we probably only own 5% of the fleet. However, that will change going forward because we believe the model should be a 50-50. But that's -- it wasn't that many vehicles that we sold to the subcontractors. It was more a reduction in fleet size.

I got you. So just 2 aspects of that. When you -- with your subcontractors, you don't have guaranteed volumes or fixed monthly rentals, is payable on a volumes delivered basis? Is that how it works, Kenneth?

That's correct. It's a pure variable arrangement. So hence, our responsibility to make sure that they get enough loads. If we're able to give them more loads, we're able to get a unit price reduction. And that's where we've got the efficiencies out of it. Essentially, we've -- on the presentation, I think we said 5% reduction. It's actually between 5% and 8% depending on which distances we do. So probably a little bit more than 5% reduction overall.

I got you. And 50-50 is a model that gives you cost -- minimal cost with, I suppose, a line for fluctuations in demand?

Correct. And if the demand is -- if there isn't a demand, we obviously have -- we give a contract to the subcontractors. And those eventually lapse and run month-by-month. So if the -- so at any point in time, even though we own 50% of the fleet, we are able to reduce the subcontractor kit accordingly. And they don't mind it either because they know that you're reducing the cost, but you're giving them -- keeping the utilization up. So the model works for us. It's a model I prefer. My predecessor had a different view on it. But the model has worked for us. So that's the kind of model that we'd like to go back to.

Thanks, Kenneth. I see in the results that Métier terminated CGIC cover because the cost of cover or availability of cover decreased, but then bought insurance to hedge against potential bad debt. I'm not entirely sure where that leaves the business. Can you clarify?

I can do. So at COVID, we got a letter saying that we had to reduce our cover by 30% and then subsequent to that, another 30%, and subsequent to that, another 30%. So effectively, the CGIC cover was so low that it actually wasn't worth having it. So we took a view to look around in the market and Santam was offering a product where we could self-insure as well as have insurance cover with it. So it's a dual effort of building up your own self-insurance with a protection mechanism that should you have a claim that an insurance policy would kick in at the same time. And we -- so far, we've been building that fund up quite nicely, and I think that's what we're going to do going forward, so we still have some protection.

So instead of CGIC cover at a specific debt level, you're now taking cover on the aggregate book with a higher self-insured deductible essentially?

That's correct, yes.

Yes. Okay. So last question, if I may. The -- just to be clear, the debt in SepCem is ZAR 581 million, that excludes the ZAR 125 million. And the ZAR 125 million, just to be clear, the commentary talks about a debt service reserve account of ZAR 152 million that includes the ZAR 125 million?

Yes. Yes, let me just explain that one. You see we always have a debt service reserve account. We'd acquired a debt service reserve account. And the debt service reserve account has to have the highest quarterly payment in the next year in it. So it had ZAR 152 million in it being the, let's say, third quarter payment for that year. But then when COVID struck, we knew we weren't going to be able to make the May payment, and we asked them to use the debt service reserve account for the May payment and then give us a relief for the third quarter and fourth quarter. And they said they only give the relief if we top up the debt service reserve account first. So we needed to refund that with ZAR 125 million, it then stood on ZAR 152 million, and they used that whole ZAR 152 million for the third quarter. That's the way the requirement for a debt service account to be -- to exist. So that was an application of this account and the existence of the account going forward was taken off the table. So there was the one payment score from the mechanism.

But the aggregate or shareholder loan is the ZAR 581 million plus the ZAR 125 million?

Yes, correct.

Charles, if you have any more questions, you may go ahead. There's no one else in the queue at the moment.

Tremendous. I have 2 more questions then, if I may. The other one is community unrest in the Lichtenburg area. Could you give us some sense of what you're encountering? We hear different reports of what people are experiencing there.