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

Good day, ladies and gentlemen, and welcome to Sephaku Holding Limited's Interim Results Presentation. [Operator Instructions] There will be an opportunity to ask questions when prompted. [Operator Instructions] Please note that this event is being recorded. I'd now like to turn the conference over to Kenneth Capes. Please go ahead, sir.

Thank you very much, and good morning to everybody, and thank you for joining us. And the results were announced on Thursday, the 9th in the SENS announcement and in the newspaper on Friday, the 10th. And the format that we're going to follow is our Financial Director, Neil Crafford-Lazarus will do an overview of the financial results. And then Duan Claassen, CEO of Sephaku Cement; and myself on the Metier Mixed Concrete side will have a look at the outlook. So I'd like to hand over to Neil Crafford-Lazarus.

Thank you, Kenneth, and welcome to everybody on the call. As Kenneth said, the results have been known to everyone for the last couple of days. So I'm just quickly going to recap. Set the scene for any questions that might be forthcoming. So the first, second, and third pages are the normal readings, agenda, and disclaimer. So I'm going to skip through and start with the financial review. Moving on to Slide 4, #4 on the financial review for the groups, Sephaku Holdings. Earnings per share, basic earnings per share down from ZAR 0.105 to ZAR 0.0775 of HEPS, 26% drop there. HEPS, the same, ZAR 0.07254 (sic) [ 0.0754 ] but from an ZAR 0.1126. The NAV up by the profits generated to ZAR 4.67 and the same accounted loss of ZAR 14 million against the profit of ZAR 3.8 million that they contributed last year for the 6-month period. Brings us to the profit after tax for the group of ZAR 19.7 million, down 26% from last year's comparative to 26.7%. The Metier side, all green arrows. On the right-hand side, they had a fairly good 6-month period. Turnover went up by ZAR 100 million to ZAR 626 million. The EBITDA at ZAR 62 million at an EBITDA margin of 10%, an increase of 6% above the ZAR 59.2 million of the previous year. EBIT at ZAR 52.3 million, 8.4%, up from the ZAR 43 million of 2023, leaving then with a profit after tax of ZAR 37.8 million, up from the ZAR 29.5 million by 28% from the previous year and contributing, therefore, to the positive numbers to this with if we're looking at the ZAR 19 million of -- sorry, the ZAR 14 million equity loss that were accounted for basically the influence of taking that ZAR 37 million down to ZAR 19.7 million after also taking account of year end's costs. SepCem, slight increase on the revenue side from ZAR 1.16 billion to ZAR 1.24 billion. EBITDA, ZAR 106 million, down ZAR 40 million from the previous year. And we will look at that trend and probably have a discussion around that when we get to the environment outlook. EBIT on ZAR 14 million. Of course, once the EBITDA is reduced by the ZAR 14 million margin, the EBIT, remaining portion with depreciation that is same year-on-year, takes quite a knock. So it's coming in at ZAR 14 million opposed to the ZAR 61 million of the previous year. Bringing us to a loss of ZAR 38.9 million for the 6 months compared to ZAR 10.5 million profit for the previous year. But we will have a look at the last 3 months on our update for the 9-month period for the year-to-date. And see that there was some good recovery over the last quarter. Looking at the trends and we've gone back as far as 6 years because that was the last year that we really had good cement sales and construction results. After that, we saw 2019, which was the first year that demand on the cement side really dropped by about 18% and then we hit the COVID period. But Metier has now, for the first time, recovered above the 2018 levels on all 3 legs. Last year, we already saw price and revenue above the 2018 levels. And this year, we've been -- they've managed to also increase the volumes above the 2018 levels. So everything is positive on the Metier side there. And as I've just mentioned, volume is positive on 2018 for the first time. Moving on to Page -- Slide 6. Page 7 of the booklet. The financial review for Metier. Gained a 20% increase of the gross profit to ZAR 233 million, 6% EBITDA increased to ZAR 63 million, 19% EBIT to ZAR 52 million, all following just seeing better improvements as there is slight improvements on volume and price as depicted by the bar charts and all the results on the line graphs. So a 47% increase in net profit, the final line for Metier is ZAR 30 million. On the SepCem side, trend is still below the 2018 levels for these volumes. As you can see, the yellow bars, 82% of that for the current year. And it's back to, as I mentioned, we were pre-COVID already in 2019, we really saw a big drop in demand on the cement side, and there was a 19% drop during that year. And we're finding that for the last 2 years, the cement demand for the 6-month period has remained the same. And we're still sitting at 81%, 82% of the 2018 levels. For the specific current year year-on-year, 1% increase in sales volume, 7% increase in revenue, and a 4% to 6% increase in pricing. I've talked about the volumes that was comparable with 2019 levels. And I think Duan will elaborate on what is being done to achieve cost efficiencies and then -- cost-cutting and other efficiencies throughout in a period that lower volumes that really impact on the overhead burden as a cost that don't reduce. Moving on to Slide 8. We will see the 27% drop in EBITDA to 207% there. Input cost, as I mentioned, does not recover the effect that the increase in pricing has. And you'll see the pricing. Although on the light blue bars, it has steadily increased from '22 to '23, not sufficient to any of the other lines in an upward trend. And we've seen pressure on both the EBIT, EBITDA, and the net profit. So EBITDA down 77% from the ZAR 14 million to the ZAR 38 million. So that ZAR 14 million of profit to the ZAR 39 million for the current year. Moving on to debt management, Slide 10. With the results that we've seen from Metier, also significant cash generated by them in relatively speaking to what has been done previously. We started the year with an overdraft of ZAR 13.56 million, again, reflecting back mainly due to that payment of the debt in October of the previous year. Generated ZAR 62 million during this period, tax paid of ZAR 6.7 million, and CapEx of ZAR 25 million, repayment of financial obligations, ZAR 10.5 million, and currently sitting with ZAR 7.25 million cash on hand. On this, focus on main side, the Slide 11. We started off with ZAR 108 million. Cash in the bank generated ZAR 154 million, outflow to capital expenditure of ZAR 31 million, net financing cost, ZAR 17 million, lease payments, ZAR 17 million, loan repayment, ZAR 67 million, and then a ZAR 24 million (sic) [ ZAR 124 million ] cash at the end of the term. Again, I think there's an update for that one coming up now as we move on to Sephaku operational updates for cement. The numbers that we've reported on is the 6-month period or half year results, but it covers the period, 1 January to 30 June because SepCem is a subsidiary of DCP and that is their year end. So we can also now discuss the results for the last 3 months to bring them up to date to the September numbers. First of all, just to look at the imports, it always has an effect on the market. And I know it's something that we get asked for regularly. So just an update on the numbers there. You can see fairly comparable cement coming being flat. There's a little bit of a dip on the second half of last year, but it's still again on the '21 levels. If you're looking at cement clinker, it's always also being relatively the same throughout the period. And then the final, the graph, at the bottom, it's just showing what the impact of the exchange rate had on imports, not -- and previously, we believe that it was -- that it had a direct -- there was a direct relationship. But at the moment, you can see that there was 3 imports during this year even though it was quite a negative effect on the exchange rate. Moving on to Slide 14, just the update that we've also mentioned in the results. The 9-month turnover is ZAR 2.08 billion as opposed to the ZAR 1.83 billion of the year-to-date to Q3 for last year. EBITDA at ZAR 208 million as opposed to the ZAR 192 million, which you will see is a good turnaround. The 6-month period was ZAR 106 million, ZAR 107 million. So there was another ZAR 101 million, ZAR 102 million added during the third quarter. EBIT currently sitting on ZAR 73 million as opposed to the ZAR 64 million of the previous year, coming up from the ZAR 14 million that we saw for the half year that we've discussed. The same debt position after the 9-month period, the Nedbank loan started the year at ZAR 403 million, ZAR 102 million was repaid. So that's going be sitting at ZAR 301 million. The DCP bridging loan, that is the one that has been running up over the period, while banks loans -- because it is subordinated to bank loans, but that will be serviced over the 5-year period once the bank debt has settled. We just still -- we just got another 2 years to go with a ZAR 300 million outstanding at ZAR 150 million per year. Lease is sitting at ZAR 19 million. So the total debt of ZAR 1 billion. Cash on hand is ZAR 220 million. So the net debt position for cement is ZAR 850 million. And as you know, that brings us to the outlook. I'm going to hand over to Kenneth and Duan to speak about the current environment and as such, on the outlook items as mentioned on Slide 17. Kenneth, you want to start with this, please?

Yes. Thank you, Neil. So essentially, on the Metier business, we have a program where we're focusing on our products and our customers. Obviously, we do that all the time. But we're specifically looking at our products for optimization. There's a lot of money and a lot of margin to be made. And we're running various systems that we put in place, where we can measure more accurately. And then, of course, on the customer segmentation, it's trying to ascertain the groups of customers that require specific value products and services that we offer rather than just shotgunning the whole market. And so far, it's working. I think you can see it in the results. The proactive adjustment of the business model to align with the prevailing conditions. A lot of that has got to do with the infrastructure projects that are coming out. We are trying to be very quick to react. We're busy building another batch plant, which is to cater for some of that. There's certainly a lot of high-valued products that are required for these projects. It's not your everyday concrete. And it's a huge focus of ours to try and react quickly to what is required for these projects. And then, of course, we continue our sales efforts in the Western Cape. We keep talking about it. We haven't expanded our footprint yet because of the other projects that we've been looking at. So we're not in a hurry, but we certainly are in talks with various people on properties that are available for us to expand in the Western Cape. So that's certainly an ongoing focus for us into the new financial year as well. And overall, as far as the market is concerned, although the construction market in certain sectors, and Duan will maybe touch on it and retailers, they're certainly struggling. Some of the bulk projects that we involved in are continuing to give us some good volumes, and we're putting a lot of focus on making sure we get all of that right. So we're still -- we're quite optimistic about the future on the ready-mix side and probably slightly different on the retail side, at which point, I'll hand over to Duan to give an update on Sephaku Cement.

Thank you, Kenneth, and good morning, everyone. I think it's important maybe to start off by saying the first half of the year, if one looks at the results, it was quite clear from the third quarter that there was quite a significant turnaround. I think every year, we've got the same phenomenon where with us being a single kiln business, whenever you have your planned outage, whichever half of the year that falls in is of course going to be adversely affected as far as the variable cost is concerned. As Neil mentioned, in terms of the absorption of your fixed cost into lower inventories that you produce, that's, of course, going to affect results. But I think it's good to see that on a 3 quarter year-to-date basis, it's looking a lot better. And I think overall, the outlook would be that this trend would probably continue for the fourth quarter. I think what we are definitely finding is the market is still severely subdued from the volume trends that we saw. We're still 18% down on what we used to sell in 2018. And that is mainly from the subdued retail sector where that is really under a lot of pressure. And it's been basically the second year running that we now are seeing this trend continue. Fortunately, for us, we have targeted some other sectors. In terms of the industrial sectors, Kenneth has mentioned that they have seen some benefit in some of the projects. And we've leveraged on that to some extent as well to counter the negative trends in terms of the retail sector. I think last year, we mentioned that with the subdued environment, we needed to rightsize the business. And we continue to implement that throughout this year. And we're starting to see that, that is clearly realizing the benefits that we had anticipated. And this is something that we will continuously monitor. And that's really in terms of the plants that we've got available to make sure that we source from the cheapest and lowest cost to market options is what we try and execute. So that we can maximize the benefits that we can realize under these very subdued conditions. Alternative fuels is something that we are still driving aggressively and we're continuing to do so. And there's more development that is ongoing and into the next financial year. There's further developments and capital projects that we're going to execute to put us in a position to use even more alternative fuels as a means of hedging against carbon tax on the one hand, but also just cost of energy on the other hand. And then as far as the technology that we're employing, and that's really in terms of route-to-market optimization synergies that we're looking for in terms of delivery of product, returning of raw materials to the plants, et cetera. So that is an ongoing focus area and that's something that will probably become even more important again, under these adverse market conditions. And then we also have enhanced the customer targeting through business intelligence tools, which we've developed in-house. And this is something that is coming in very handy to target specific micro markets where there's -- where we have certain benefits in terms of delivered costs compared to vis-a-vis competitors, and we're exploiting those micro markets to make the best of these conditions. Kenneth, I think that's as far as the presentation. I think I'll pause there, and then we could take some questions if there are any questions later. Thank you.

Thanks, Duan.

Thank you, gentlemen. [Operator Instructions] At this stage, we have no questions from the telephone lines. Do you have any questions from the webcast?

Yes. Thank you. Judith. We have one that's just come in. Let me just go through it. Just give me a moment to look at it. Please clarify the SepCem debt management and repayment strategy. Previously, you mentioned the DCP loan interest will be serviced from 2023 onwards. Your comments today suggest otherwise. What are the specific bank covenants' restrictions preventing service of interest to DCP? Thanks, Lennart. Yes, there's no change in that. I think we did mention previously that we had an intention to really start paying interest last year. But if you look at the results that we've seen with the 82% levels of our 2018 production, we are in a position that the cash flow was just not available. You'll see the opening cash for the year was ZAR 108 million. And then interest on a ZAR 600 million, ZAR 700 million loan came in to ZAR 64 million per annum. So the cash flow didn't allow it last year to do that. And the same, with the start of the first 6 months this year, the free cash flow would just not allow it. We will review it towards the end of the year and do that if possible. With regard to the covenants, we have negotiated, debt funds can be available for these type of payments, but there is a debt cover or not a debt cover, an EBITDA cover that is required. I think it's sitting at 1.3. So we will -- depending on whether we meet that covenant and cash is available and will be required within the first 6 months of the next year, we will look at that and, if possible, start reducing that number.

Thanks, Neil. I don't know if you have any more questions.

There are no questions on the telephone lines, sir.

A question -- also another question from Lennart to Duan. When is the next killer maintenance shutdown? And given the quarterly volatility it creates in reporting, made the guide be -- maybe guide us to the next cycle's timing, please. It's just a matter of when you anticipate the large, the big shutdown, Lennart.