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

Good day, ladies and gentlemen, and welcome to the Sephaku Holdings Limited Year-end Results Presentation. [Operator Instructions] Please note that this event is being recorded. I'd now like to hand the conference over to Mr. Neil Crafford-Lazarus. Please go ahead, sir.

Thanks, Judith. Thank you very much. Good morning, everybody. Welcome to the call. From the Sephaku side, we have 3 participants. Kenneth Capes, the CEO of Sephaku Holdings and Métier; Duan Claassen, the CEO of Sephaku Cement and Dangote Cement in South Africa; and myself as financial director of SepHold. I will start the presentation with the financial results and then hand over to Kenneth to address the environment, the Métier results, and then Duan will talk to the cement results. I'm going to go straight over to Slide 3 (sic) [ Slide 4 ] and talk about the financial review. Slide 4 is the results, salient points. The group representing a net profit after tax of ZAR 25.6 million. That is down some ZAR 19 million from last year's numbers. The basic earnings per share is ZAR 0.10 compared to the ZAR 17.5 of last year. HEPS at ZAR 9.98 and normalized HEPS of ZAR 10.53. Just the additional normalized due to the impairment effect we did on a loan that was converted into shares, and we did an impairment on the [ UAM ] asset, as well as part of the [ Métier ] loan. As for debt outstanding, a total of ZAR 2 million, but we've been carrying it for some time. They were raising money and it didn't look like they were going to be able to repay. Now during this year, it didn't happen and we decided to reduce those numbers. But I'm not going to come back to that, just the mention of that movement on the normalized earnings. Just a focus of main equity account loss was ZAR 2 million compared to ZAR 28.9 million profit of last year, and we'll come back to that on the right-hand column. Métier had a really good year, a ZAR 200 million increase in sales revenue. EBITDA went up from ZAR 75 million to ZAR 98 million, and the margin from 9.5% to 10%. The EBIT margin of 6.5% at ZAR 64 million, up from the ZAR 48.2 million of the previous year. And the net profit after tax, ZAR 43 million, up ZAR 13 million from last year's ZAR 30 million. Looking at Cement, I think we're all aware of the trading conditions in the cement and demand of that. We saw sales revenue going down by ZAR 100,000 -- ZAR 100 million, from ZAR 2.6 billion to ZAR 2.5 billion. But EBITDA were down from ZAR 375 million to ZAR 279 million, nearly ZAR 100 million drop there. EBITDA at 11.4% as opposed to the 14.6% last year. Main contributions here is, of course, if the demand comes down, your earnings -- your fixed cost for the time goes up substantially and then the cost of energy was a result of the Ukrainian and Russian war, which will be [ end of year ] reduction. EBIT 4.3%, ZAR 104 million, it was ZAR 219 million in the previous year. And net loss after tax of ZAR 4 million compared to the ZAR 82 million posted last year. Moving on to Slide 5. Back to the review of Métier, we have 2 graphs here showing the trend over a 5-year period and a 3-year period, one being post-COVID through that and then, of course, the other one since the COVID year. You will see from that, that revenue increased year-on-year by 25%, 14% increase in sales volume after we saw a 25% increase last year, and a 9% increase in pricing on the back of the high increases prior an input cost. So that's motivation for the price increases, volumes will return to pre-pandemic levels. So here, you can see on the 5-year growth that they are now ahead of what it was in that period, and then the last 3-year growth shows exactly where those contributions came from. So for the first time, we are ahead of the financial year '19 levels, which is 9 months of 2018 and just 3 months of 2019. You will recall that the demand already in calendar year of 2019 dropped off substantially. So we saw a couple of weak demand years here, but then a turnaround between '21, '22 and '23. Moving on to Slide 6, just the profitability trend. 31% increase in EBITDA and a 33% increase in EBIT from ZAR 48 million to ZAR 64 million despite the increased operating expenditure. 16% increase in operating expenditure, which includes plant expansion in the Western Cape, of course. And the 43% increase in net profit was supported by lower finance costs. The debt was settled during the year and Métier is currently only operating over a drop -- over and above the finance facility for the vehicles from previous [ payments ]. Opportunity exist for '24 with growth in the Western Cape and on infrastructure projects, which we've been seeing coming through during the last year. Tenders are being awarded, and we seek to benefit on delivering against those tenders in the next 3 years as these are all long-term projects. The hybrid transport model enables effective control of the cost -- key cost driver and responsive increase in the fleet when required. There's always a system that we've been running where we have our own fleet and driver fleet, which controls our ability -- well, that eases the ability to control the cost of the third-party transport because we are exactly aware of what the cost structure for the operation of those vehicles and those fleet as a whole. Moving on to Slide 7, Cement volumes and pricing. A 4% decrease in the revenue year-on-year is a result of the 12% decrease in sales volume and 8% increase in pricing. And I think the demand, specifically on the bagged side, were down during the calendar year 2022, which is also Cement's financial year, and that's still at [ 87% ] of what we saw in 2018. Even on the short-term growth post the COVID year, there's still volumes that doesn't match the 2020, in which we had a 5-week shutdown with the [indiscernible] stage 5. But of course, a very good second half where we saw the utilization of cement for stay-at-home consumers during that second half period. Sales volume now down to -- coming down from 2018 and the lowest it's been in the last 5 years, as clearly can be seen from the graph. And pricing margins have not kept up with the equitable drop in the market volumes. I think we, again, been hit by 2 on both levels there, both fixed cost gets impacted by the drop in volumes. And of course, the variable cost, specifically with the items I mentioned earlier, the high energy cost. And for that, we'll be targeting towards margins by tight control of cost whilst navigating the energy crisis, maximizing benefits from alternative fuels and optimizing market segmentation and price increases to offset cost. That is something that needs to happen in the next year. And I think first year, as that [indiscernible] will lead to that again. On to Slide 8, SepCem's 5-year trend. We can see on volumes and pricing how the volumes are still below the 2018 numbers. Pricing slightly above that, but the results suffering as a result of it. The gross profit line fairly flat. But all the others, specifically with the last year due to the drop in volume, we've seen deterioration of all 3 the other lines. Moving on to Slide 9 for our analysts that normally require a breakdown of the cost per category. We always include this slide. I'm not really going to talk about it. Main contributors today is the transport, salaries and electricity, and the others include a balance of factories, [ transport ] costs. Moving on to Slide 10, a review of the cash flow for the group. We started the year with ZAR 29 million. Cash generated net of leases, ZAR 64 million, and that is all generated by Métier. Of course, we're talking about the group, which is now SepHold and Métier. Interest income of ZAR 2 million and taxation paid ZAR 6.5 million. And then acquisition of assets, ZAR 24.5 million. Repayment of installment sales and repayment of bank debt, ZAR 51 million. I think the bank debt that we needed to pay during that year was substantially lower. That includes ZAR 35 million early payment of the debt that was supposed to be paid in the current financial year. And then payment of lease, ZAR 19 million. Leaving us with an overdraft of ZAR 13.5 million out an overdraft facility of ZAR 80 million that is available for the group. Just a comment on the bottom here, the ZAR 35 million payable in FY '24 was paid in October '22, and the increased utilization of the vehicle financing facility during the year was to improve the fleet or the age of the fleet. In other words, replacement of some of the older vehicles, also replacement of owner -- progress with owned fleet and then additional vehicles for the Western Cape expansion. I mentioned the ZAR 80 million overdraft, and that is normally utilized over month end because we pay creditors on time and some of the debtors coming through the first week of the following month. And therefore, there's the utilization of [ ZAR 13.5 million over '19 ], but it is a positive balance for the [ number ] of the months on a -- well, on a consistent basis. Moving on to Slide 11, as far as the Cement cash flow is concerned. Cash at the beginning of the year, ZAR 325 million. Cash generated, ZAR 180 million. Taxation paid, ZAR 6.119 million. The taxation is -- this is also a Cement group result. So taxation is paid by Sephaku Development, which is the mining company that mines the [ oil ] and sells it to DCSA. The production company had their own tax paying position. So this is the group [indiscernible] brand. Net cash out for PPE and PPE intangibles, ZAR 44 million. Net finance cost, ZAR 38 million. And lease payments, ZAR 30.5 million. Loan repayments, that is ZAR 376 million -- or includes the ZAR 376 million of the bullet that was paid in November. So it's -- half of that is normal payments in the first 3 quarters and then the bullet in November, and which we refinanced. So there's [ the loan ] received. We have this facility of ZAR 400 million put in place, and ZAR 200 million worth of capital facility which was unused. Cash at the end of the year, ZAR 108 million. Moving on to Slide 12, the Cement debt structure. Just the movement of the old senior loan in the year started at ZAR 667 million. June -- by June, it was down to ZAR 528 million. Of course, the ZAR 139 million [ service ]. And there was another capital payment of what ZAR 150 million on the 1st of August, and then on the 1st of November. The final ZAR 377 was settled through the loan that we've raised. And the working capital facilities put in place, as I said, still unused. The cost of the new funding is at JIBAR plus 3.25%, as opposed to the JIBAR plus 4.50% that was the cost of the previous funding. So a 75 basis point benefit -- or 125 basis benefit from that restructuring of the finance loan. Then we then get to the trading environment, and I hand over to Kenneth to take you through section 2.

Thank you, Neil, and good morning to everybody online. So I think it's no sort of expectation of anybody to see that the trading environment has now become weaker and weaker. We know that the GDP is under pressure. We know that the gap is widening between the South African and the global GDP, and we know that consumer spending is under pressure and especially now with the increase in interest rates. And we can see that in the sales of our pocket of cements, and that it's affecting the retail demand for building materials. The GFCF, as a leading indicator of underlying cement demand, indicating signs of recovery. Still way below target, but improving. And if you look at the construction subsector, only contributing 5.5% of GDP, up from 5.2% and still well below the average of 8% to 10% in recent years. We have seen that on the residential sector, there has been a slight dip off in the residential sector demand. The nonresidential sector still being stronger, although commercial offices, hotels, et cetera, continue to be nonexistent, and mainly the industrial boxes that we supply still showing some improvement. Social infrastructure spending is also very low. It's actually hit the lowest in the last 10 years. And all of this is still keeping a very difficult trading environment. If you look at the next slide, an indication of the building plans passed and projects completed. Obviously, there was a pickup since 2020 since COVID, but we have seen a slight downward trend in terms of building plans passed. But our recent indicators are showing us that there is definitely an uptick in civils, which relates a lot to the government infrastructure spend on roads and water projects. And that certainly is showing some improvement. Whereas the private investment improvement is -- sorry, the private investment is still relatively flat and with a slight downtrend. The interest rates are obviously going to hit the residential property demand. But hopefully, there are indications that, in the next year, we will have a different trend with interest rates. And with any luck, the residential market will stabilize again. On Slide 18, with cement import volumes. Duan, could I ask you to comment on those?

Thank you, Kenneth. Good morning, everybody. Yes, I think we know the environment is severely subdued, but we're still seeing imports coming into the country, albeit at lower levels, perhaps aligned with what we're seeing our assessment of the markets in general seem to be. There has been talk of protection that we've been seeking as an industry. It's unfortunate that we need to report that this has unfortunately been stalling, dragging on. I think part of the problem is the mere fact that imports are reducing and, hence, the argument for protection seems to be questioned. Currently, we as industry body also looking at, again, antidumping duties specifically against Vietnamese cement as an alternative to a general safeguard. So yes, Kenneth, in conclusion, it is still a big concern for the industry. And all we're asking for as an industry is protection against imports and level playing fields. There's many factors that we as domestic producers need to implement, consider as part of our production cost, which, of course, doesn't apply to imports. Thank you, Kenneth.

Thank you, Duan. Moving on to the operational review for Métier. So some of our focus areas was to establish the Métier brand in the Western Cape. We have been growing our customer base steadily. Our volumes have grown steadily. We feel that it's still a place that we need to be positioned, and I'll talk to that a bit further just now. With regards to 2023, we replaced some of our loaders. We're upgrading some of our assets. Obviously, during the COVID year, we held back. So the last 3 years, we've been doing quite a bit of renewing of assets, which was also helping us to improve our maintenance costs. And our average fleet age is now within the targets that we have set ourselves, and we'll continue to manage that. We also set ourselves a target to restructure the bank debt, which has been done and Neil commented on it. We really just used the overdraft facility at month end. Other than that, we are in a much better cash position. We also set ourselves an internal target of growing our margins over the Construction Materials Composite Price Index, which finished at 9.1% in March, while we improved our margins to 11%. We did this by focusing on our value-added products and looking at where -- on the services supply, where we could increase our pricing as well. And the team has been very successful at doing that. On the health and safety, we've had zero operational fatalities. Duan?

So if we move on to the next slide in the presentation, Slide 20, just a general feedback on some of the material matters that the Board has identified for the calendar year 2022. Just a brief report back on some of those matters. Firstly, on input cost pressure. I think we've explained it in the past as well, the Ukraine situation, the pressure that has put on input costs, specifically energy-related input cost. We have done very well as far as leveraging against the opportunity to substitute, thermal substitution, against coal. And we've achieved substitution levels in excess of 30%. So that's up from the high 20s that we reported a year ago, and it's continuing to improve. We've also, towards the latter half of last calendar year, introduced waste tires. And again, that's to mitigate against some of these coal price increases that we've seen. Just for information, if we look at our energy cost, the year-on-year increase in thermal energy cost, we've managed, through these substitution efforts, to contain that to levels just above 10%, 11%. We've -- if one looks at our cost makeup, distribution outbound transport cost is a significant part of our cost makeup. 26% is what we've shown in the pie chart. And the year-on-year increase on that has been just below 20%. So with that, we needed to look at various ways of mitigating against that. And we've introduced a costing benchmark, which is internally developed, to really use as an ongoing tool to optimize tariffs and route to markets. We've also been implementing various austerity measures. Neil mentioned with the drop in volumes, of course, focus is on fixed cost. And there's been a number of measures that we've implemented, including the moratorium that we've placed on short-term incentives. Second material matter being the low demand situation. And there, again, it's focusing on market and supply chain optimization, route-to-market opportunities. As far as community disruption, we have reported in the last update that we have got the approval of our social labor plan. It took a bit of time to get all the community representatives and the various government departments to agree in the labor plan. That's been implemented, and that will definitely unlock certain elements of social delivery. We've also been part of Ditsobotla municipality industry forum that was established to fast-track some of the high-impact upliftment projects in partnership with DMRE and local government. As far as the availability of power, I think it's important to state that it's mainly our downstream value-add customer base that has been affected severely by ongoing load shedding, whereas, we are contracted to participate in the load curtailment system as opposed to load shedding. We have continued to look at time-of-use optimization, especially with the lower demand scenarios that brings some off-peak opportunities which we've exploited. As an ongoing investigation into finding a permanent solution for the power crisis, we are continuing, and we're about to go out on an RFP for solar PV at both our plants at Aganang and Delmas. In terms of shortage of technical skills, yes, it remains a big focus area for the Board, and we continuously focusing on retaining those critical skills. We have certain long-term incentive schemes and, of course, we're also looking at continuous training and development of our technical staff. Next slide, Slide 21, just gives us an update on the first quarter of post period. So the revenue, we've seen an increase of 5.4% year-on-year to ZAR 583 million. Our volumes for the first quarter is marginally up year-on-year. Within this sluggish economic environment that we've seen, which is defined by, of course, the low construction activity, especially in the residential building activity. We have also experienced higher-than-average rainfall in the inland region. And of course, we know that the consumer discretionary incomes have been under pressure, and that's mainly due to the high inflation and the rising interest rates. We've also seen the record levels of load shedding especially in the first quarter of this year still. And that is, as mentioned, affected our downstream customer base, specifically brick-and-block makers. So the resulting quarterly EBITDA has decreased. It's been reported as ZAR 31.3 million as against the previous corresponding period in the previous financial year of ZAR 89 million. That is, however, mainly due to comparative inventory depletion, single kiln operation. The first quarter is typical for planned kiln stoppages. The base year, being 2021, we actually had a reduced stop in the first quarter since we had a prolonged stop in the winter months to do a shell replacement. So we're coming off a slightly anomalous base here. If one looks at the quarters, the first quarters in the last 5 financial years -- 4 financial years, we've seen ZAR 27 million in '19, this anomalous ZAR 89 million and then ZAR 31 million for the current year. So mainly related to stock movement and something that we typically do catch up during the remaining part of the year. The movement on inventory, just for interest, year-on-year as a result of this was to the tune of ZAR 120 million. Thank you. Kenneth?

Thank you, Duan. And then just a quick view on our short- to medium-term outlook. We are expecting demand to be flat. We see demand for mortgages to decline slightly because of the interest rate increases. We think that the nonresidential construction activity will persist at its current levels. And of course, the implementation of the government infrastructure plans, and as I mentioned earlier more specifically on the roads and water environment, where we are seeing projects being released. In fact, we've seen a number of projects being released. However, in the private sector, we still see a subdued environment. As far as the group focus is concerned, SepCem is going to be vigilant on cost control, as it is always, and very specific to drive its price strategy. We have seen in the above slides that you can reduce your cost to a certain level, but a lot of the costs are impacted by external factors and we need to find a way of actually recovering those costs in the marketplace. Otherwise, we're just going to continue going backwards. Métier will continue to grow at Western Cape plant network. And there is a big focus on securing its share of infrastructure construction, which it is currently involved in a number of projects already. And that is the end of our presentation.

I see there are a couple of questions that are coming through. I've received 1 or 2 by WhatsApp. So could I just go straight into 1 or 2 of the questions. And one question that we have here is, can you please comment on the Lafarge acquisition and what this means for the industry? It seems like other cement players are also up for sale, will Sephaku likely play a role in further industry consolidation? So this is clearly a topic we've mentioned over the last couple of years about consolidation and what it would mean for the industry. I think the -- some of the problems that you have with consolidation is nobody is expecting to consolidate and then reduce their absolute volumes of consolidation. So although it seems like a good idea, and I think that there might be some opportunities for not necessarily a consolidation with reduced volumes, but a consolidation to improve efficiencies, we certainly would be looking at what those opportunities might be for us going forward. With regards to the Lafarge acquisition, I think our view is very similar to what PPC mentioned, and that is that Afrimat is a responsible player that plays a significant role in the South African construction industry. So we feel that it's probably very good for the industry, for the cement industry as well. So we don't see any negative play coming out of that acquisition at all. Neil, could I ask you, there's a question here on what are the repayment plans for the shareholder loan of ZAR 685 million. And I know you've been involved with that, if you wouldn't mind answering that.

Sure, yes. It is -- of course, some are related to the bank loans and also to the refinanced ZAR 400 million bank loan, which has got a 3-year repayment term, of which we are now halfway through the first year of that. We've loosely spoken about it. And the intention would have been that it will also be repaid over a 3- or 5-year period. We would like to start servicing the interest in the current year through next to [ pick ] that amount at the ZAR 685 million where it is and not for it to [ sort of have ] interest growing even further. So depending on our results for the current year, the interest -- serving interest of that is something that will be considered and was something that we mentioned that we would want to do when we negotiated the refinancing of the bullet. So it has been on the table and discussed with the banks. But of course, certain covenants needs to be met in order to do that. So the EBITDA must get the correct debt-to-EBITDA ratio before we could really start addressing that. But that's the intention, to start servicing interest as soon as possible and to do the payment once the bank loans have been settled due to the fact that it is [ subordinated to that ], but also over a 3- to 5-year period. To be discussed in the next year, and we've raised in the last months. ExCo discussion with both shareholders of present, and it is something that we see potential. But there's nothing -- no firm contract on it at this point in time.

Thank you, Neil. I don't have any other further questions that have been sent through to me. So...

It should be on the call. If we can just go back to Judith to find out whether there's any...

[Operator Instructions] Gentlemen, it appears we have no questions from the -- my apologies. We have -- a question has come through from Charles Boles of Titanium Capital.

Kenneth, just to come back to the comments on the industry structure and Lafarge. I understand the point that nobody wants to consolidate and take out volume, could you maybe provide some more detail on the comment that you made of taking out volume for efficiency? There would seem to be operations that could combine that could make sense, but is it possible to give us a bit more detail on that?

So yes, correct. I think that if you look at the fact that we are producing way less than what we need to, and we've got kilns running all over the place, I think that there could be -- all those will be used determine plant sharing, where, from a production point of view, you actually produce for somebody else so that you can get the cost structures down. So those are the potentials that we see. Again, it's really going to depend on who wants to make the first move on it. But I do think that there is that potential. We have been looking at what are the different scenarios and playing that out, and we certainly would be open to looking at that.

So...