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

Good day, ladies and gentlemen, and welcome to the Sephaku Holdings Limited Interim Financial Results. [Operator Instructions] Also note that this event is being recorded. I would now like to turn the conference over to the Investor Relations Officer, Sakhile Ndlovu. Please go ahead.

Thank you, Chris. I welcome you all to the Sephaku Holdings FY 2022 Interim Financial Results for the 6 months ended 30 September 2021. To take us through the presentation this morning is our Sephaku Holdings CEO, Neil Crafford-Lazarus. He'll be joined later by the Sephaku Cement acting CEO, Duan Claassen and Métier CEO, Kenneth Capes, for the question-and-answer session. The sales announcement and results presentation were released yesterday evening at about 5:00 p.m. available on our website. However, if you've not been able to download or are failing to download, please don't hesitate to send me an e-mail on [email protected], and I will try and get it through to you as soon as possible. I'll now hand over to Neil to proceed with the presentation. Over to you, Neil.

Thank you very much, Sakhile, and good morning to everybody attending the call. I'm going to run through the presentation, and I will -- If I remember [Indiscernible] I refer you to the number which slide that you can -- that know which one I am on. I'm not going to spend time reading everything on that because you have had it in front of you -- some of you had it since a while, it published afternoon, you have the content, and I think we need to get to questions and answers. So on Slide 1, you will have the agenda and we are going to look at the financial performance and how that has recovered post-COVID-19, where the trading is normalized, how the operation is going at the moment and whether they're only lingering impact with COVID-19 and how it's affecting the business. And then just a quick look at our Métier that we use with regards to the building materials industry. I'm going to just skip the disclaimer, which have all read already as well as the introduction on Slide 3. Moving to Slide 4. The recovery of the post-COVID-19 results. And you will see green arrows all throughout, what we're comparing with was a period that included a 6, 5-week lockdown on level 5 and also a lockdown 4, that still impacted Métier and that has been bend operating 50% of capacity. So with regards to group ZAR, a net profit after tax of ZAR 17.8 million for the 6 months compared to the ZAR 29.6 million last year. The ZAR 17.8 million also compares well with 19.7% full year profits that we reported in March. Earnings per share nearly ZAR 0.07 compared to a loss of ZAr 11.65. EPS also at ZAR 0.07 and the Sephaku Cement equity accounted earnings of EUR 2.8 million compared to a loss of EUR 30.1 million in the previous period. Métier, increase in turnover, ZAR 400 million as opposed to ZAR 300 million in the comparative period, EBITDA of ZAR 44 million compared to ZAR 27 million and EBITDA margin of 10.8%, would that be 9.4% in the first half 2021. EBIT margin of 7.6%, ZAR 31 million as opposed to ZAR 15.9 million so doubling the EBIT and net profit after tax, ZAR 20.1 million compared to the ZAR 7.5 million in the previous period. So focus on end. We saw a turnover of ZAR 1.2 billion compared to the ZAR 900 million previous year, EBITDA of ZAR 150 million compared to the ZAR 60 million of last year, EBITDA margin at 12.4% as opposed to 6.8% both of comps periods in which we normally had our annual shutdown where we have a 25-, 28-day period in which there was no production from the kiln and a number of a lot of rigs cost and gain that normally affects the EBITDA of [Indiscernible] compared to what we will find in 3 other quarters being substantially better. EBIT margin 5.7% at ZAR 68 million compared to a loss of ZAR 1 million in the previous year and the net profit after tax, ZAR 7.7 million as we accounted the 8 point -- ZAR 2.8 million in our results. Moving on to Slide 5. Métier recovery during this period, the cash flow for the interim period ended 30 September. We'll see an opening cash of ZAR 32 million, cash generated from operations of ZAR 33 million in expansion into the Western Cape, ZAR 12 million spend at [Indiscernible] ZAR 6 million on civils and ZAR 6 million on fleet and a loan of split ZAR 4.5 million, ZAR 1.5 million. So that's the ZAR 12 million expansion into the Western Cape, and we also spent ZAR 16.8 million on debt repayment. That included a ZAR 10 million suite that we've done because we did have sufficient cash on hand and was identified as being available for the suite, so only ZAR 6.8 million. And the normal capital repayment profile and an additional payment that we just did before the end of September. Cash at hand for the end of the period, ZAR 19 million, the ZAR 8.8 million, of course, leases of vehicles. Moving on to Slide 6. Looking at the cement results, opening cash of ZAR 480 million. Cash generated from operations, only ZAR 45 million. If you compare to the EBITDA that we highlighted in the fourth slide, which was ZAR 150 million as a quick reconciliation between the 2 years that ZAR 19 million went into stock. You will recall that we have means before that there was a high demand of products for the last 6 months of 2020, and we were really in a sold out position. Stocks were repeated and then during the first 6 months has needed to be restored. So as the EBITDA for the period was ZAR 150 million, the cash from operations was only ZAR 45 million. We still had the bank payment schedule of ZAR 127 million. So ended with the cash on hand ZAR 350 million, 4 and 6 months that cement ended -- ended for cement on 30th of June. If we look at the nonfunding, Métier [Indiscernible] ZAR 72 million, [indiscernible] ZAR 16.5 million, which I've just discussed with [Indiscernible]. So balance at the end of September, ZAR 55 million, and you will recall that we have a final bullet for that in March of 2023 of ZAR 45 million, which will now lay down to ZAR 55 million because this week goes off the last payment. So ZAR 20 million to be serviced over the next 18 months. On the cement side, started the year with just over ZAR 1 million. Capital was paid of ZAR 127 million, interest of ZAR 41 million. So we had a 30 June payment of balance of ZAR 905 million. Subsequent to that -- to the time that we're reporting on now, another payment of ZAR 116 million was made and the balance at 30th of September, was just below 780 -- ZAR 790 million. Subsequently, further to that on the first of November, again, we might pay another ZAR 116 million. So that is currently sitting at [Indiscernible]. A question, whether trading has normalized? Moving on to Slide 10, you can see a graph just depicting revenue and volume over the last 5 years. And the reason why we've done that is often -- discussion and measuring COVID-19 recoveries by talking 2 levels of 2019. But I think it's important to bear in mind that for the mining and construction industry, 2019 was already the first year, I think we record numbers of 19% down in volumes at some stage overall. And then on specifically on cement side and then you can see that if you look at the June 19, 77% of the normalized 100% of 2016. So yes, we've seen recovery. We're definitely seeing recoveries to levels approaching the 2019 levels, but it's not approaching levels that we've seen in the first -- the 3 years prior to 2019. So we're not back to the 2016 to 2018 levels yet with regards to volume and revenue. Moving on to Slide 11, revenue and EBITDA. We had to see that -- we have seen better years in the Métier side, up until 2018. We had a drastic reduction nearly half. That's an EBITDA in 2019, 2020 had some of the COVID numbers in -- although there was some recovery already from April next year and in the comparing number for the current year of ZAR 67 million on EBITDA on the cement side. Not that drastic move, but still seeing some recovery on the EBITDA that, that compares with the previous levels and then better than the 2019 numbers with what's the revenue and EBITDA. Look at normal operations, and in Métier side, everybody is aware of the expansion into the Western Cape. It's started the loading and the specs on that side. We have purchased our new trucks. It's part of the number that you saw in the capital expenditure. It's always difficult to start out with contractors with regards to this type of -- especially, you can't -- in early days, keep our fleet busy and it's better to just start up with your own and onboarded up and then expand into the contractors as and when the volumes increase. On the cement side, ongoing commentary on ITAC and the imports of cement, you can see that there is no let down on that high volumes in Q1, 2 and 3, and nothing showing that, that will reduce during this period and the ITAC is still eagerly awaited. I'm sure Duan will update you on question time with regards to where we are specifically with that process. Industry overcapacity continues to intensify our competition. I think we've seen that some of the integrated producers also closed ready mix from own ready-mix operations, that means that they still need to move that cement and the [Indiscernible] would go into lenders or other club utilizations and then that keeps the competition on the cement side, quite intense, where there might be a lesser number of large ready-mix producers. Those also then disappear. I mean it's just smaller units, we buy the operations, and do it in more than one location rather than [Indiscernible]. First period performance impacted by plant outages, Slide 16, I think we have had the 2 press releases on that. The 9 months prior to the period ended 30 September, sales volume increased by 6%. Revenue increased to -- from ZAR 1.6 billion to ZAR 1.9 billion and EBITDA increased from ZAR 214 million to ZAR 243 million. The EBITDA margin was at 13% and then the 2 outages as, I referred to, first outage due to corrosive element in raw materials, rising damage to the preheater refactory, the raw materials was placed as an alternative. The second outage to repeat the kiln internals to prevent further damage. An interim solution was implemented, with the long-term solution scheduled for Q1 2022. This will mean that our first quarter stoppage of next year will be for an additional 7 days instead of the normal 38 days. We will take the kiln off for 35 days and do the long-term repair for that kiln. In the impacts of COVID-19 and how it impacts and affect the business, I think basically all implementation and protocols as one would expect, [Indiscernible] if you have not covered that yet. Medium-term performance in the industry. Again, I think we remain cautiously optimistic. We see tenders being available to be the reacted and we heard about awards, but everything does take time, and we still need to see those volumes and the loss from that coming through. It was a good response to the designated product announcement. And again, there's been a small deviation of that already with regards the Senegal situation out of the -- these kiln type. So it's something that we're watching as close as you are watching it Ladies and gentlemen, that's what I have to say with the results, I think we will now take questions, Ndlovu.

Thanks, Neil. I think I'll hand over to Chris to request for questions.

[Operator Instructions] Our first question is from Rowan Goeller of Chronux Research.

Just a quick question on costs in SepCem, there has been quite reasonable cost pressure coming through in both energy and logistics. There has been good price increases on the cement side, but can you just comment maybe on the real price increases that you have achieved over the last year and what you expect over the next year, please?

Thanks, Rowan. Duan, can you respond to this, please?

Thank you, Neil. Rowan, yes, as far as price increases, I think positive side, we've seen for the first time in a while, these price increases sticking so far compared to last year. We've managed to achieve in the order of 7% to 9% increases, which is substantially better than some of the results that we've seen in preceding years. Of course, the input pressure on costs, some of those factors that I think we're all familiar with, Eskom being major factor, 15% increase is now in the second year in a row that we're having to absorb sort of increases like that. There's also a scarcity of paper, European papers as far as our bank pricing is concerned, there's some growth inflation increases and cost pressures. As far as going -- and then, of course, diesel and transportation is something that we're all watching very carefully, and it's certainly aiding to the cost to market as far as our logistics transportation costs are concerned. Going into next year, I think we would certainly do everything we can to try and absorb some of these input costs. And again, the ranges that we're having to request in the market is up to the market would be 7% to 9%, 7% to 10%, and that sort of ballpark is how we're calculating our input cost to escalate. So that's more or less what we're looking at going into the new year.

And then just a last question on margins. You haven't really been in steady-state operations. But I think prior to that, you were close to just above 20% EBITDA margin in your cement operations. Would you still be round about there in a steady-state operation right now?

Yes, we've certainly seen the cost input pressures eroding away at those margins. I think the margin that we're operating now would be south of those numbers. And the steady-state conditions on the assumption that input costs would be depressed on to the end users. Yes, the target would be to get closer to the high teens and to those numbers that you're referring to. At the moment, it's not running at the sort of levels.

[Operator Instructions] Our next question is from Rajay Ambekar of Excelsia Capital.

Just a couple of questions. Firstly, you talked about the overcapacity in the industry in South Africa. Can you maybe just talk through maybe what would be your best view of how that resolves itself over time? And maybe link it to maybe how capacity might come out of the market as some of the older plants maybe shut down because of maybe the cost to upgrade that? Maybe just a view on kind of that industry and how you think it might play out?

I think a difficult one to really dip with any amount of certainty. I think the one thing that one can say, and I think Duan will elaborate on that once I've -- and my two cents worth is, of course, the emissions, taxes and the impact of that, and as that becomes compulsory to operate under you might see a call again as to whether one need to spend the necessary CapEx to become compliant or whether you're just going to close. That might have an effect on available capacity, yes. But purely waiting for capacity to die, that could be 10 years. I mean you never know how long someone is prepared to run current existing operations and be happy with the returns. We have nondepreciating assets, and that is what we work with. If, of course, the maintenance doesn't get you in the end. But it's difficult to have a prediction as to how long. But I think Duan might have a more specific view with regards to the reaction on legislative restrictions that we're expecting by the end of next year.