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

Good day, ladies and gentlemen, and welcome to the Sephaku Holdings Limited Interim Results 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.

Thank you, Irene. Good morning, ladies and gentlemen. I welcome you all to the Sephaku Holdings Interim Financial Results Presentation. My name is Sakhile Ndlovu and I'm the Investor Relations Officer. To take us through the presentation this morning is Neil Crafford-Lazarus, the Sephaku Holdings CEO. Neil will be joined by the Metier CEO, Kenneth Capes; and the Sephaku Cement CEO, Duan Claassen, for the question-and-answer session. The results presentation and the sales announcement are available on the company website on the URL link, www.sephakuholdings.com. Those of you on the webcast can find these documents in the download section of the interface. If you are unable to download the documents, please send me an e-mail to [email protected] and I'll forward them 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. Good morning to everybody, and welcome to the results presentation for the first 6 months ended 30 September of 2022. The agenda is a very familiar one. We're going to have a financial review of the operations and in a couple of slides on the outlook. I'm on Slide 2 now, which is the disclaimer, which is also familiar and which you can read at your leisure and you'll find it on the website. Moving over to the financial review. On Slide 4, the first column is the Sephaku Holdings results. We've seen a basic earnings per share increase to ZAR 0.1051 from the ZAR 0.07 of last year, an increase of 51%. [indiscernible] went up to 11.26% from 703, mainly 2 items the loss on side of vehicles and the provision that we made for a very old debt outstanding by the Union Atlantic Minerals. They've been in a fundraising process for the last couple of years. But the best moment just after half year end prompted us to bring 50% of that into consideration for this half year's results. Net asset value of ZAR 0.461 per share and Sephaku Cement, equity accounted earnings, ZAR 3.8 million, up from the ZAR 2.8 million from last year, still a really flat industry at this point in time. So after that, the profit after tax for this -- for the group, ZAR 26.7 million, the HEPS was ZAR 28.5 million, and that is up 50% from the ZAR 17.8 million of last year. Looking at the midyear results, which is the operations really driving the group results at this point in time. Sales revenue, up from ZAR 411 million to ZAR 523 million. EBITDA ZAR 15 million increase in EBITDA, 34% increase. And then on the EBIT increase of ZAR 12 million. The difference between the increase in the EBITDA and the EBIT is an increase in fleet, which are leased assets, but accounted for depreciation under IFRS. Profit after tax for midyear of ZAR 30 million as opposed to the ZAR 20 million for the comparative 6-month period last year. On the cement side, I think you've all seen announcements by retailers and also other producers that we've had a market that was down on last year again. Sales revenue, ZAR 1.16 billion, that is ZAR 330 million from 2021 just to point out, you'll see the competitors for Cement is 21 and the competitors for group and Metier is 22. That, of course, is because Cement has a December year-end and with the -- for the 6 months to June of this year, which will compare to the 6 months of last year to June and the year-end is therefore a 21-year involves [indiscernible] 22. EBITDA, ZAR 146 million, just down slightly from the ZAR 149 million of the previous year. EBIT ZAR 61 million as opposed to the ZAR 67.7 million and the profit after tax up ZAR 10 million from the ZAR 7.7 million. So again, the difference there in the interest, the debt being reduced constantly handing the refinancing, of course, on the 1st of November. Moving on to Slide 5. Net year revenue and the volume price analysis. We've gone back to a 5-year view here. And you'll see that revenue has for the first time surpassed the 2018 numbers. We have been always referencing our current year 2018 because 2019 was already the first year in which we saw a drop in demand in the construction industry and we had 3 relatively bad years. After that, the September '20 results, of course, was included that level 4 and 5 lockdowns. So that's why the pricing and the volume will need 61 and 62 on the index was compared to 2018. Recovery, therefore, on the revenue and pricing side and volumes approaching 2018 levels was -- is higher than the 2019 levels at this point in time. Comparative year-on-year, 27% increase in revenue, 16% in sales volumes and 8% to 10% in pricing would affect to that revenue increase. That price increase compact annual growth rate of 3% per year with a 5-year period, giving us the 16 that we see on the relative scale. Moving on to Slide 6, just an indication of what the contributors was to the different levels of the contribution to profit. The 23% increase in gross profit of ZAR 294 million against 29% increase in cost of sales. I think we're all very much aware of what we've seen in fuel costs and the effect of electricity and the availability of that on cost of sales during the last 6-month period. 34% increase in EBITDA to ZAR 59 million is something that we've already had on the salient features and the compound annual growth rate of 9% over the 5-year period. EBIT is up 39% to the ZAR 44 million, with a growth rate there of 7% over 5 years, 90% increase in operating expenses due to the high inflation cost in business, which I've mentioned, very, very high double digit at 47% increase in the net profit to ZAR 50 million. Moving on to Slide 8 and the Sephaku Cement numbers. You'll see that, that pricing has throughout the period, with the exception again of the COVID period, been showing an increase over the period and currently sitting up at an index of 123 from the 100 of 2018, but volumes are back to 2019 levels, which is even lower than what we saw in 2020 because we had a very good second half during that year. Low levels of volumes, of course, has a large impact on -- over each of the per unit produced and that has a big effect on the numbers that we are currently looking at. So this 1% drop in gross profit and EBITDA to ZAR 411 million from the ZAR 147 million, respectively 4% increase in the cost of sales. Input costs increased fully recovered by the pricing, not fully recover. So I should say it's [indiscernible], 9% down in EBIT and to ZAR 62 million and admin experiences down by 13% as part of the cost-cutting, rightsizing in every possible exercise that is required under these difficult circumstances. Something we provide regularly just the breakdown of the cost here, you can see that energy affected cost element is greater than 50% of cash costs. Transport 25% concluded in the other of 16 is clinker transfer cost as well, which is another transport element. Moving to Slide 10. And consumer hold household income that have [indiscernible] result in reduced demand. That is what we've seen. The graph shows the pickup. And if we're looking at the household consumption expenditure, they rolled up from 2014 to 2020, a severe drop and the gradual pick up. But still, GDP not really out-stepping those levels and below that, taking a turn for the negative in 2022. The household [indiscernible] disposable income. Again, fairly steep numbers that we're looking at that having an effect on available discretionary income to spend on the commodities. Financial review of Sephaku Cement on Slide 11. Selling imports and clinker imports are shown along this graph. Down, but I think down in a market where demand is also down. So the effect is basically just following the trend of what we're seeing on demand in South Africa generally during this period. Financial review for Metier, start of the year with cash balance is below ZAR 30 million and generated ZAR 30 million in cash, interest income was less than ZAR 1 million. Taxation CapEx and then financial liabilities after that is repayment of the existing standard back debt, which will be at ZAR 35 million at the end of the year, currently sitting at ZAR 41 million cash at the end of the period, ZAR 38 million -- ZAR 37 million. Looking at the Cements position. Cash at the beginning was ZAR 325 million generated by operations ZAR 122 million. And the main one debt repayment during the same period, ZAR 169 million, ZAR 140 million, taking the cash at the end of the period to ZAR 268 million. That, of course, was the balance as at ZAR 32 million, subsequent to that, another payment was made in August, and then the bullet was settled on the 1st of November with the refinancing of a ZAR 400 million facility just by Nedbank and Standard Bank, where previously we had a consortium of 6 banks involved. This is a 3-year loan with JIBAR plus 3.25% and therefore a substantial reduction in repayment profile for the next 3 years compared to the 2 that we just coming out of. Financial review for -- from -- spoke to the debt restructuring, the amount of ZAR 377 million plus interest at the 30th September was the amount of equity finance. And we -- the final point on that slide, then we've also got a working capital facility available at prime less 50 basis points that is available in a mixture of FX, LCs and overdraw facility making up ZAR 120 million of the ZAR 200 million facility. Operational review for Metier. Looking at Slide 16, continued growth in Cape Town. Segmentation, product segmentation is a key driver of margin to customers segmentation to limit bad debt. Those are all, I think, aspects that we have been operating under and have been focusing on for the last 3, 4 years and then pay more at the moment, as you can see from the Metier results. Superior customer service, specifically the focusing on those aspects of the industry, we do have the technical know-how and equal to make the difference and make the contribution. And the fleet being in process -- process of being replaced as you've seen in the depreciation numbers as well. There has been new leases coming in to replace older vehicles in order to keep the fleet at a average age at an acceptable level for us. Looking at Sephaku Cement on Slide 18, cost efficiencies is at the order of the day. I think everything is currently focused on that in an industry where demand is down from previous years. And therefore, fixed cost is under pressure. Everything else is being reviewed and looked at from an ongoing basis. Growing quality volumes with the higher margins in the correct areas is what we're trying to focus on and increase that proportion in the mix. As far as alternative fields is concerned, we have mainly increase in the digitalization of the use of tires. I think Duan will cover that in questions. And we are -- as I said, everything is basically being -- nothing is spared at this stage. Our ongoing supply chain optimization, driving operational excellence, regular engagement of key suppliers on improving trading terms, those are all ongoing. And then the installing of the high-performance culture, critical skills retention, ongoing training and development, enhancing full year engagement, I think that's an important aspect as well. One of the things that -- and I think we're coming back to it on the outlook as well that, that is something that we will continue to do the enhancement of the employee engagement. If the group as a result, as we have today and the content is not clear, a increase of 50% on net profit after tax, even if it is only from ZAR 20 million to ZAR 30 million, the 50% increase in profit is what sticks and then it's very difficult if you are talking to a cement employee to say that we are in difficult circumstances and we really need to cut costs as far as possible and increases needs to be reviewed and burns needs to be reviewed, all these type of things, to come back as easily, but you showed a 50% increase in profit, and we want to participate in that. So that's the enhancement of the employee engagement, very important here to communicate the full picture and for everybody to realize exactly where the specific industry is on that page. As I also said, Cement reported until June. So we do have a post period until 30th of September and really seeing that the tough trend is continuing. Sales volume decreased by 15% and there's inflation depressor on customer distribution income, as we mentioned in the availability of funds and the debt levels. The prices are in flux, aftermath and the industrial action limited access to markets, which has also had an effect therefore on the prices of [indiscernible] deliveries and the Falcon brand that we are marketing there. And then record levels [indiscernible] that has doubled year-on-year. Not necessarily always hitting production in Cement, but hitting consumers and having an effect on the demand and the timing of the demand. So revenue decreased to ZAR 1.83 billion from ZAR 1.94 billion in the 9 months complete from between '20 -- 2 year and '21 year and intense competition is still weakening pricing lower volumes, you can see an EBITDA increased from ZAR 192 million -- to ZAR 192 million from ZAR 243 million, there's a substantial drop there. And mainly because of high inflation costs that while we've seen them cut through during the period that all basically now hit and is affecting total cost of production at this point in time. Outlook, looking at Slide 21. The demand for building materials is expected to remain constrained. The current and the constant levels there is constant. It's just that at '21 price, whilst the current one is, of course, a nominal demand that is planted on that growth and then very slight move during this period. Potential medium-term [indiscernible] private investment into energy-related infrastructure. These also no new entrants expected due to the lower demand and I think that's also why we're not seeing a strong input at this point in time. Demand for building materials is also expected to remain constrained with flat demand during infrastructure input as you can see that. And there's really little to get excited about on that graph. And then on the right, the cement demand for this industry capacity, that gap remains 13.4% demand and 18.24% capacity available. And that is, I think, why we made the comment that we're not expecting any interests, that, that gap remains and it's easy to ramp up should prices justify that all volumes require an increase in production. With regards to the specific outlets, Metier to maintain the focus on the product and customer segmentation for active adjustment of the business model to a line of prevailing trading environment and further focus on the sales, if it's in the recent trade. On the Cement side, increased use of alternative fuels, that's also something that you could collaborate on if there's any questions, the right size of the business model to align with prevailing trading environment. That has been an ongoing and a very difficult exercise, but something that is now being done. Increased use of technology to [indiscernible] enhance the route to market and supply chain with optimization also with the fuel cost, something that we continue to look at and will continue to look at. And then the point that I referred to just now enhanced customer adopting through business diligence tools. And there, again, every point of sale being one as to the contribution and looking at how the -- what the distribution should be and with the focus of marketing shift referred to stock. Ladies and gentlemen, that concludes this presentation. I will hand back to Sakhile for questions.

Thank you, Neil. And we've already started receiving questions through the webcast. I'll go straight to them and then we'll switch to the conference call. Our first question is from Jovan Jackson from Laurium Capital. And he is asking if we think we might have lost market share in South Africa. I assume this is for Sephaku Cement. I'll hand over to Duan. Do you feel like you have lost market share in South Africa?

Duan, not sure if you're muted.

Okay. If Duan is not -- is he on the call? Is he muted, Irene?

He is connected -- he is connected on the call. Duan, just make sure your line is unmuted, sir. Okay. I will reconnect him.

Okay. Unfortunately, most of the other questions seem to be for Cement. So I'll have to -- if you can just give us a second to try and reconnect Duan.

I don't know if I'm audible.

Yes, you are now.

Apologies for that. Seem to have lost the line. I think the question was regarding the loss of market share.

Correct.

I think it's very difficult to assess that accurately because of the lack of information and statistics that's not available. So we can only go on our own internal analysis. And I think it's been I think agreed that there's distinctly different environments prevailing, the inland region versus some of the coastal regions. We're predominantly in the inland region. And I think where we've seen marked drops in -- drop off in demand and this is from discussions with some of our main customer groupings, they seem to concur that they have double-digit numbers in year-on-year changes certainly in the retail sector. So on that basis, we do feel that there was a period earlier in the year that we might have lost to market share. We were fairly aggressive in terms of pricing. It's been well-documented that for a number of years, the industry has not been able to pass pricing or input cost inflation on to end users or customers. And we've been attempting to do that for a period of time already. And we have taken a bold step earlier in the year. And so the assessment was that we would have lost a little bit of market share earlier in the year and needed to take some corrective steps according to our own intelligence and assessments. So I think currently where we stand is we don't think that there's a massive change in market share. But again, that's based on our own internal research. I hope that helps answer the question to some extent. Thank you.

Thank you, Duan. Another question for you from Charles Boles from Titanium Capital. He says this talk in the market that Sephaku Cement has become more aggressive on pricing under the guidance of its controlling shareholder and is now a price leader in the market, can you please comment on this?

When we say price leader, we're talking about increased pricing or...

Yes. It seems like you've become more aggressive on pricing in the market under guidance from you -- assumed DCP?

Well, as mentioned in the previous response, we had -- we have taken an aggressive approach towards pricing, understanding the underlying input cost pressures. We have had to make some corrective steps since the earlier announcements earlier in the year. But in our assessment, we're definitely not the market leader in terms of pricing. I hope that answers. Thank you very much.