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

Good day, ladies and gentlemen, and welcome to Sephaku Holdings Limited's year-end financial results for the 12 months ended 31 March, 2022. [Operator Instructions] Please note that this event 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 very much, Judith. Good morning, all. I welcome you once again to our FY 2022 financial results for the year ended 31 March, 2022. To take us through the presentation this morning is the Sephaku Holding's CEO, Neil Crafford-Lazarus; and Neil will be joined by the Sephaku Cement CEO, Duan Claassen; and the Métier CEO, Kenneth Capes, for the question-and-answer session. The -- since announcement, the annual financial results and the presentation are available on our website for download. Alternatively, you can actually download them from the webcast download tab. Otherwise, if you fail to do so, please don't hesitate to send me an e-mail to [email protected], and I will forward it through to you as soon as possible. At this point, I want to hand over to Neil to proceed with the presentation. Over to you, Neil.

Thank you very much, Sakhile, and good morning to everybody that's participating. I am -- pleasure in presenting you with the financial results. I believe that everybody has got the presentation up in front of them. I'm quickly going to move through the first 4 pages. Page 1, just a welcoming slide. Then on Page 2, just the agenda as -- which is also really familiar to most of you. Financial review of the trading environment, operational review, outlook and then appendices, if there's anybody that's new to the group and want some more information. We have the structure and the operations, they'll find it in that section there. There's nothing new on the disclaimer on Slide #2. That is the same that you have seen before, but at your leisure, please read through that one again. Then on Page 3, we are moving towards the financial review for the current year. On Slide 4, the salient points for the group. The net profit after tax was ZAR 45 million, ZAR 25 million more than the previous year. That resulted in earnings per share of ZAR 17.5 and in HEPS of ZAR 17.67, which is ZAR 0.11 up from the previous year due to the fact that I think last year HEPS had a bit of [indiscernible] vehicles in it that brought that down from ZAR 7.83 EPS. Sephaku Cement equity accounted earnings is ZAR 29 million compared to ZAR 16 million of 2021. Looking at Métier specifically, revenue of ZAR 785 million, up from the COVID year ZAR 634 million and an EBITDA of ZAR 75 million compared to ZAR 55 million of the previous year. EBITDA margin 9.5%. And EBIT margin of 6.1%, ZAR 48 million, that's a ZAR 15 million increase from the previous year. And net profit after tax is also up from ZAR 16.6 million to just under ZAR 30 million for Métier. Sephaku Cement. Sales revenue increased by ZAR 200 million from ZAR 2,4 billion to ZAR 2.6 billion. EBITDA was fairly flat, down ZAR 6 million from ZAR 381 million to ZAR 375 million. EBITDA margin correspondingly down from 15.9% to 14.6%. I think the [indiscernible] to that we have discussed fairly extensively in the interim results as well because there was a large effect of that came through in the first half where we had the [indiscernible] with the low base clinker and also the results that we published when Cement had the full year results included in [indiscernible]. EBIT margin 8.6% on ZAR 219.4 million, exactly the same as the 2021 numbers. And net profit after tax ZAR 81.9 million as opposed to ZAR 44.4 million. So that all lies in the different interest rates -- not the interest rate, interest payment coming down from ZAR 163 million to ZAR 114 million for the year, and then a ZAR 5 million increase in the [indiscernible] tax, of course, due to the improvement of the results due to the interest that was lower. So a 82 versus 45 on the cement side. Moving now to Slide 5. Revenue trend for Métier. I think if we're looking at the right side of the slide, the last 3 years, that's a question that is often asked, when do you expect to return or to improve to the pre COVID-19 levels. And for us, that of course is the FY 2020. That's got 9 months of 2019, 3 months of 2020. It had only one week of COVID. So that was our pre COVID year. '21 then saw a reduction of both revenue and volume, pricing up slightly to [ 103 ] of the comparative and you can see that in 2022. In the current year, we have been above the COVID year levels in all -- on both the parameters and, of course, then the result of that. However, 2019 calendar year, which is really reflective of our 2020 year was already a fairly weak year for construction and cement in South Africa. That's the year we -- our own cement saw a reduction of 15% in volumes. And I think industry-wide numbers as high as 19% reduction in sales volumes were reported. So if you go back and look at the 2018 and 2019 financial years, we are still below those with regards to the sales volume. Pricing is up [ 108% ] to the index, which is also not really recovering the PPI for a 4-year period, which I think just again points to the very good recovery that we are seeing in the turnaround strategy on cement with the results -- resulting from those drivers. We saw a -- looking at the last year, we saw an increase of 24% in revenue year-on-year, 18% of that coming from sales and 5% coming from the pricing. Moving on to Slide 6, which shows the profitability trend. Again, looking at the 5-year trend and where we were in financial year 2018 before we saw the first reduction in '19 and '20, turnaround at a [ ZAR 34 million ] EBITDA and a loss for that year of ZAR 600,000. Recovery last year levels of ZAR 55 million and ZAR 16 million and in the current year ZAR 75 million EBITDA and ZAR 29.6 million profit after tax. And I think Kenneth will talk to how we are experiencing the first 2 months of the current year. But I think, again, our margins are on those levels improving, but we're not yet seeing our results that we said we did achieve in financial year 2018. Moving on to Slide 7. That is the cement comparison, again. Looking at the 3-year trend, everything is up from the COVID year. Cement, of course, only -- and only had a lockdown of -- under Level 5, whereas Métier was locked down under 4 and 5 and then Cement saw the very good demand of cement in the second half of 2020 when the homeowner do it yourself [indiscernible] quite a lot on acquiring cement and something that we've probably seen leveling off in the current year. So there was 7% increase in revenue year-on-year, 1% decrease in sales volume from last year and an 8% increase in pricing. Volumes are still relatively flat from the previous terms as we've shown in 2017 and 2018 and not yet on those levels, still running as far as volumes is concerned, on 92% of what we've achieved earlier. We look at Slide 8. It shows the profitability trend of SepCem. Again, over the 5-year period, we see 3 years of recovery. I think just -- for those of you that's not familiar with the history, the ZAR 128 million in 2018, into that ZAR 84 million was [indiscernible] tax benefit. So that's the reason why that one ease out of line. It would probably be, as I said, ZAR 84 million of that ZAR 128 million was tax. And -- but steady improvement in the numbers over the last couple of years, specifically on the profit after tax number. The EBITDA is fairly flat, but that profit after tax has improved due to the fact that we have been servicing debt throughout these periods with those EBITDAs. And we've seen a steady increase in profitability as a result. We're always being asked about the cost split for SepCem. And we included on Slide 9. I'm not going to talk to that, but it is in the presentation for those of you who are interested in that breakdown. Available for you to look at your leisure. Moving on to Slide 10. Financial review of the Group, this excludes Cement. Opening cash of Métier and Sephold of ZAR 33 million. Cash generated was ZAR 66 million. The net finance costs ZAR 11 million. And taxation paid ZAR 9 million. PPE -- net payment for PPE was ZAR 13 million. That's -- the things -- the items that was not leased like the vehicles that you will see further to the right loan proceeds. During 2020, we sold a number of the older vehicles to contractors that do provide services to us, which we refer to as [indiscernible] drivers. As [indiscernible] the finance and that is this repayment of the loans over [indiscernible] month period that has come through in this 12-month period. That's the green loan proceeds repayment installment sales. Repayment of lease speaks to itself from the repayment of the debt principle, ZAR 23 million on that, of which 13.311 was the required repayment. There is a ZAR 10 million suite that we've done to close the year with ZAR 29 million cash. ZAR 10 million reduction in the loan is better than having that additional cash on hand at the back. Sorry, I have to skip this slide now. This is the Métier debt reduction on Slide 11. Started with ZAR 71 million, ZAR 23.3 million repayment, interest portion is ZAR 5 million. And we ended the year, a debt of ZAR 48.3 million. That will reduce in the current financial year to ZAR 35 million, which is payable in the first month of the following financial year. Looking at the cement cash flow analysis, they started the year with ZAR 480 million. And cash generated during the year ZAR 343 million. Small portion of tax. Net finance cost ZAR 61 million. And net cash from investment activities ZAR 45 million. Cash from financing activities ZAR 385 million going to the banks -- on the repayment of the senior debt and the year was ended on ZAR 325 million. Just bear in mind that ZAR 480 million at the beginning of the year included a shareholder capital injection of ZAR 125 million during that period. So it might have been down to ZAR 120 million -- to ZAR 200 million if that injection did not take place during the previous financial year. Looking at net debt profile, started the 2020 calendar year at ZAR 1 billion. The ZAR 353 million you just saw on the cash flow statement, interest payments included in that. So the year was ended on ZAR 666 million. We've already made another ZAR 138 million payment on 1st of February and 1st of May. So currently, the debt outstanding on the senior debt is ZAR 528 million. We are well advanced in refinancing the [indiscernible] due on the 1st of November. We do have final credit approval from both the senior lenders that will continue with this. As you know, the regional senior debt was 6 -- consortium of 6 different banks. This will now go down to 2 main participants in that function -- in the original loan as Standard Bank and Nedbank, which will continue with the financing facility then from November onwards. The agreed terms is a 3-year term loan at JIBAR plus 3.25%. We currently was paying JIBAR plus 4.5 on the original line. So there will be an improvement on that cost of funding. And there's also a working capital facility being secured for -- at prime minus 0.5% to facilitate just the swings and roundabouts of debtors and creditor [indiscernible] at the end of each financial period. Moving on to trading environment and then Slide 15. Weak macro economy since 2012. And I think looking at the South African picture, in red, a good injection of [indiscernible] and then very flat growth for us during the period and not really anticipated to improve if we're looking at the IMF Forecast on the right for '22, world 3.6% with 4.4% in January. And South Africa 1.9% January number as well as the revised April '22 number. But expecting for 2023 1.4% for South Africa, thanks the world growth of 3.6%. Slide 16. We're showing the decline in the gross fixed capital formation as a percentage of GDP. And to the right, the distinction between private business enterprise, public corporations and general government. Basically, showing that it's only private enterprise that has recovered post the COVID decline and is currently above the end, but the rest are performing below that line. Moving on to Slide 17. Again, GDP per sector on the left, the construction industry, the blue line, which is the bottom of the pile on the right once you move past the gray line period, the first half of 2020, you'll see that that trade catering and accommodation outperformed everybody else and the lowest there is construction, which we've seen due to a number of promises regarding infrastructure spent by government and allocation of large contracts, which has just not got off the ground to date. Moving from building plans passed on the right, nonresidential, showing to January '22. We've actually seen a reversal of these 2 trends over the last 3 months. We -- there is a pickup on the nonresidential side again. But on the residential side, there has been a decline, again, I think, to a large extent a number of factors influencing discretionary income on the residential side, interest rates, back-to-school issues and things like that, rain in the first quarter as well and we've seen a negative reaction on the residential demand for cement during this period. Slide 18. Cement imports increased significantly over the last 5 years. And again, a very slow or no reaction on the ITAC side. On this, this has been going on for much longer than what we anticipated originally and then nothing. This is a big question mark whether industry will be assisted in this way at all. There's a requirement from government that industry should commit to no increases on prices, as a quid pro quo. But I think the industry's argument has always been that our quid pro quo is really already included in our full cost of production. This is not a -- tariff that is required for protection -- as a safeguard protection is purely safeguarding against the cost of doing business in South Africa, much higher emissions control, our requirements of the ownership and everything else that the companies, the cost of producing the goods in South Africa as opposed to the cost of landing the imported cement and competing in the South African market. But as you can see there, no reduction in those numbers during the last year. Moving on to the operational review. Slide 20. Métier, just feedback on the 2020 focus areas. It's basically yet to be seen. We established the plant in the Western Cape. And we utilize existing assets to the extent that it was possible. We didn't increase our fleet, but that was partly Western Cape and also demand in [indiscernible]. We further reduced bank debt as planned as you've seen on that 32% to ZAR 48 million. And we -- I think during the COVID period, debtor insurance has just become [indiscernible]. And we are implementing a much stricter control at the process and looking at a self-insurance product there rather than getting external insurance for debtors. On the health and safety side, zero operational fatalities. We had 16 employees who contracted COVID-19, but all are fully recovered. And we've got a 75% vaccination rate in the company. Looking at Cement on Slide 21, a further reduction in debt as we have discussed, down to ZAR 666 million at year-end and into the ZAR 500 million at the moment. To improve plant reliability through expanding the Tokafatso organizational improvement initiative, that's really being [indiscernible] and it's got a buy in from all participants. We finally obtained approval for a social and labor plan. This is a very long haul with getting community across the line, but it has been awarded in January of this year. And we have -- we are also well on our way in achieving the target of 30% of available renewables, obtaining a 27.9% usage of all the renewables -- of the alternative fuels in our process. Health and safety stats for cement, zero operational fatalities during that year as well. We had 124 employees that contracted COVID-19, and we had 2 mortalities on that side. The balance has fully recovered, and we have 71% vaccination on that rate in the cement. This quarter for cement, as you know, the results included is for the calendar year '21. So at this stage, can look back on the first quarter, so that there was a 2% year-on-year increase in revenue, but that was all in price. Volumes were down 6%. Low construction activity, high rainfall and then also reduced consumer discretionary incomes that I referred to when I was discussing the curve of demand. Moving on to the outlook, fourth agenda item. Slide 24. Really just expecting the medium-term demand to stay flat. Demand for mortgage is expected to decline as interest rates increase. Low nonresidential construction activity is expected to persist as we saw some increase there in the plans approved, but nothing really big. Implementation of government interest rates could provide the impetus that we require. But I think it's well known and well documented and reported in the media as to how slow that process is really going. So our focus will remain cost control, reducing the debt and monitoring the possibilities that the Western Cape present us with. Ladies and gentlemen, that concludes the presentation. As I said, the appendices is available for those that need additional ground information.

[Operator Instructions] At this stage, we have no questions from the lines. I will now hand over for questions from the webcast.

It doesn't seem like we have questions on the webcast either. I think we can give it a minute or 2, and we might be getting some questions through the conference call.

[Operator Instructions]

We've received some questions. I will just start with the first one from [ Karl ] who is from Business Day. He says, could you please expand on the hybrid transport model and what you are hoping to achieve. In addition, any further areas of management focus to offset inflationary pressure costs. So I think the first one is to Métier. And then the second part is to both Métier and Sephaku Cement.

Kenneth?

Thank you. So in regards to the hybrid transport model, we are finding that -- firstly, that the banks are reluctant to give finance to subcontractors, especially in the construction space. So by having the hybrid model allows us to increase our fleet as and when required a lot quicker and that we have our own vehicles. We can move around from one region to the next region. It also assists us in understanding the cost of transport so that we're not overpaying for subcontractor transport. As far as the inflationary pressures are concerned, we did put through an increase on the 1st of June to try and recover some of that. So far, I'm very happy to say that we seem to be doing very well on it. And we've got a couple of initiatives which we've put in place in terms of holding on certain expenses, which we believe that are not critical. And at this point in time, I'm pretty happy to say that we seem to be successful with that as well. I hope that answers the question.

If we can get Sephaku Cement, Duan, to talk about management focus on inflationary pressure costs.

Thank you, Sakhile. Yes. As mentioned, severe input cost pressures with the global supply chain and energy crisis. So firstly, pricing is something that we aggressively looking at closely, understanding, of course, the very tough trading environment, but pricing is certainly one lever. Secondly, we're looking at a number of initiatives, primarily around the use of alternative fuels and waste materials to try and offset some of the energy costs. We're also looking at optimizing on market segmentation to try and grow quality volumes as opposed to just volumes in general. In addition to that, there's also a number of, we believe, supply chain optimization opportunities in terms of taking materials to the market and materials back to our plants that we've not fully exploited. So that, in addition to the obvious cost consciousness in terms of discretionary expenditure, would be the main levers that we're targeting to offset those pressures.

Thank you, Duan. Our next question is from Charles Boles from Titanium Capital Partners. Sephaku Cement, can you provide some further insight into competitor activities? Our competitors running consistently or is supply erratic. What is your perception of Lafarge or AfriSam in the market? Over to you, Duan.

Thank you, Sakhile. Well, firstly, we're not totally obsessed with competitor activity. But I think it's important to state that we do have everyone under pressure as far as the trading environment is concerned. So from time to time, 1 years of plant breakdowns, et cetera. But for the most part, our view is that most of the competitors are trading -- operating. Some might not be at full capacity. There's a number of competitors that have got the flexibility to start or not run some of their producing units. So for the most part, most competitors are still active in the market as we speak.

Thank you, Duan. Another question from Charles Boles. Can you clarify, have the credit guarantee companies pulled back or repriced cost of cover. I think Neil touched on that briefly. If so, to what extent has cost of cover changed. Maybe we can start with Métier. Kenneth?

Thanks, Sakhile. Yes. So as far as -- we haven't actually looked back at that. We canceled ours because it became too expensive, and we started our own self-funded insurance through a third party and that seems to be working well at this point in time. So we haven't actually had a revisit with external insurance other than what we're doing with our third party at the moment. And I think the cover at the time was CGIC. And we've -- we're no longer -- we haven't gone back to anybody else with regards to that. So I don't know the cost of cover.

Thank you, Kenneth. Over to you, Duan.

Sakhile, thanks. Yes, as far as we're concerned, our customer base is fairly stable, has been fairly stable. We still have cover as much as some of the risk factors would come into play with new applications for customers. Yes, I think it is a little stricter than what it used to be purely because of the environment we're operating within. But for the most part, we're not seeing a massive year-on-year movement in terms of the cost of cover as mentioned purely because of our stable customer base.

Thank you, Duan. The next question is from Rowan Goeller from Chronux Research. Are you considering a surcharge for high fuel and other costs in the cement price. Duan?

Thank you, Sakhile. Rowan, yes, we know some competitors have gone that route. We specifically decided not to have that single line on the invoicing, but rather to look at movements in terms of energy cost and then engaging our customer base when it needs to be done in terms of price increases and the like. So it's not something that we've considered in terms of month-on-month movement as an automatic cost line in terms of the invoicing. We'd rather do it the conventional way in terms of engaging the customer base. I think if one looks at the market, the frequency of movements and engagement from various incumbents, yes, it is more volatile, and we are seeing more regular attempts to increase pricing to just pass on some of these input cost pressures. So the answer is no, we haven't -- we've considered that, but we've decided, as we speak, not to implement that at this stage.