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

Good day, ladies and gentlemen, and welcome to the Sephaku annual results presentation. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Kenneth Capes. Please go ahead, sir.

Thank you. Good morning, and welcome to everybody that's joining us this morning. This is going to be the Sephaku Holdings' year-end financial results presentation for the 12 months ended 31st of March 2024. And we're going to take you through a brief financial review, talk about our trading environment and then a very brief summary of our operational review for the cement and the ready-mix business and outlook for the coming year as well. And if I can take you through to Page 4, which is our financial review, and I'll hand over to our Financial Director, Neil Crafford-Lazarus, to take us through the numbers.

Thank you very much, Kenneth, and good morning to all the participants. I'm on Slide 4 of the presentation, financial review salient points. Group results, we saw a net profit increase from ZAR 26 million to ZAR 67 million during the year that resulted in basic earnings per share moving from ZAR 0.1005 to ZAR 0.27, HEPS ZAR 0.0966 to ZAR 0.257, and normalized HEPS only accommodates the change in additional provision and impairment of our UAM investment, which is just a flow-through from historical numbers, where there's these shares and [indiscernible] a ZAR 1 million loan that is outstanding, which we've now written down to ZAR [ 400,000 ]. The SepCem equity accounted profit of ZAR 15 million as opposed to ZAR 2 million in those results. Looking at the individual operations, Métier sales for the first time above the ZAR 1 billion mark from the previous ZAR 981 million of last year, we're looking at ZAR 1,164 million. EBITDA for Métier also up from ZAR 98 million to ZAR 133 million. EBITDA margin of 11.5% versus the 10% of the previous year. EBIT of ZAR 97 million and the net profit after tax of $69 million compared to the ZAR 43 million of the prior financial year. On the Cement side, and again, we refer to FY '23 because it's our financial year end, but the FY '23 would be calendar year '22 for Cement. And the numbers in bold is the calendar year '23, which is reported in our FY '24. So turnover for the year, ZAR 2.8 billion, ZAR 300 million up from the prior year. EBITDA of ZAR 361 million, more back to the levels of the 2021 year. We saw 2022 calendar year at ZAR [ 290 ] million. EBITDA margin 12.8%, up from the 11.4%, and EBIT at ZAR 182 million. The net profit after tax for Cement was ZAR 42 million compared to a loss of ZAR 4 million in the previous year. Kenneth, that moves us on to Slide 5. Kenneth will just talk about the revenue trend.

[Audio Gap] slightly year-on-year. The revenue has now increased by 18.6% year-on-year, an 11% increase in sales volume after substantial recoveries from full year '22 and '23, after the COVID restrictions, and some help with the opening of our Cape Town operations to increase some of the volume there as well. Overall, we've had a 9% increase in pricing on the back of high increases in input costs. And you'll see later on as well that our margins have increased nicely as the main target for us to keep up with inflation. Our volumes are doing okay if you compare to full year 2018, 2019, but that has also been on the back of [ plant ] expansion. It's not just volumes increasing in one particular area. As a result, our revenue has now exceeded the full year '19 levels for the first time. And for the first time this year, we traded over ZAR 1 billion in turnover. Moving on to the Slide 6. We've had a 36% increase in EBITDA year-on-year due to the higher revenue, as well as improved margins. And you'll see later on in my one slide how we're managing to improve our margins. We've had a 34% increase in EBIT from ZAR 64 million to ZAR 97 million, despite an increase in operating expenses. We've had a 60% increase in net profit, supported by the lower finance costs. And opportunity still exists for Métier in the full year 2025. We're going to continue our growth in the Western Cape, and we've managed to secure a couple of infrastructure projects, which has given us a good order book going forward. Métier have to overcome some of the cost pressures by focusing on the utilization of our assets. We replaced older assets, we've become more efficient. And the hybrid model that we use for transport, which is [ subcontracted ] as well as owning some part of the fleet ourselves, has been a key cost driver, and we manage it very closely. And it also allows us to respond when we need to increase the fleet for [ opportunities ], we have that -- the hybrid model that actually works well for us. Moving on to Slide 7, which is the financial revenue trend for SepCem, and I'll hand over to Duan Claassen, the CEO of Cement.

Thank you, Kenneth. Good morning, everybody. And as Kenneth said, I'm referring to Slide 7. So for Cement, we're looking at a 6-year trend from 2018, as displayed on the bar chart. We've seen a 15% increase in our revenue year-on-year, which is as a result of the -- some increases in sales volume recovering from the decrease that we reported of 12% during the prior year. And we've also seen some inflationary increase in pricing in general in our products. We must note, however, that the sales volume, as seen on the trend, is still down from pre-COVID trends. And that is really as a result of still, the overcapacity that we're facing in this country, with fierce competition still putting pressure on pricing. We are targeting to enhance our margins, and we're targeting to get that done mainly through maximizing the benefits that we can realize from the use of alternative fuels. We're also continuing to focus on market segmentation, and then also to pass price increases to offset some of the cost increases that we're absorbing. And I think an ongoing theme that we've been reporting on for the last number of years is austerity measures, which certainly is continuing. Moving on to the next slide, Slide #8, gives a profitability trend again for the 6-year period in review. And as far as EBITDA is concerned, we are happy to report a 29% year-on-year increase, again, made up of mainly the increased volumes that we saw in the industrial sector against the backdrop of a continuing subdued trend in the retail sector. The inflationary increases in pricing, as we reported earlier, was another contributing factor as well as mainly tight control of our fixed costs. As far as our net profit after tax is concerned, we have reported a profit of ZAR 41.9 million, recovering from a loss of just over ZAR 4 million prior financial year. And of course, that resulted in the group equity account -- group accounted equity earnings of ZAR 15 million, which Neil reported on earlier. If we could move on to the next slide, I think that is the traditional cost makeup pie chart that we're displaying. And there's no major movements if one looks at the trends, and that just gives an indication of where the costs, in general, lie. I'll hand back to Neil or Kenneth, as far as the next slide. Thank you very much.

Thanks, Duan. I'll tell you we're on Slide 10, the group cash flow analysis and the debt repayment. This is sort of the [ old ] one, which is really mainly supported by Métier cash flow. So last year, you will recall that we paid the bank debt in October of '22 that resulted in the fact that we actually utilized the overdraft by year-end. So we started the year with a negative of ZAR 13.567 million, generated ZAR [ 117 ] million. And then the expenditure during the year, taxation at ZAR 19 million, CapEx ZAR 18 million. I'm going to skip the treasury shares for the moment, just installment sales, Kenneth referred to the vehicle. So the fact that the strategic assets are now newer, delivery vehicles to [ settle ] now our lease liabilities ongoing, that's another ZAR 21 million; ending the year with cash at hand of ZAR 13 million. That ZAR 13 million should be seen together with the treasury shares purchased at ZAR 13.9 million that is in the middle of the waterfall. That, of course, is -- we got shareholder approval at last year's AGM to buy back shares. And by year-end, we have bought -- we bought back 12.4 million shares at ZAR 13.9 million. That continued during the process after year-end. And at the moment, we are sitting just below 9% at 22.7 million shares, and we've spent ZAR 25 million on that. The overdraft is still in place. We are considerably reducing that as we do not require a commitment fee. For that full amount, it's really only utilized once or twice a year over [ month ] when there's a lot of [indiscernible] between [ credit payments ] and receipts from debtors. Moving on to Slide 11. The same cash flow, based on the cash balance of ZAR 108 million and generated ZAR 580 million during the year. Taxation paid ZAR 17 million. That's more as a result of the new ruling that you cannot -- that you need to pay in use -- 80% of your sales loss can be utilized against current year income. So it certainly was an amount payable there. Capital expenditure items, ZAR 66 million; net finance cost, ZAR 30 million; lease payments ZAR 21 million, and the loan repayment during the year towards the banks, ZAR 133 million. It was cash at hand at the end of the year of ZAR 420 million. But as the note says at the bottom, there was ZAR 201 million on payment of creditors that only [ wait ] through the bank on the 2nd of January instead of before year-end as we normally do that. So a little bit of a more optimistic view there than what really is the case, that [indiscernible] basically half the cash adhering number to just above ZAR 200 million. Moving on to Slide 12, that's just the revised debt structure. As we've mentioned before as well, in the prior year, Cement also refinanced there with final installment of ZAR 377 million, with a ZAR 400 million [ 3T ] term facility -- a three-year term facility and a ZAR 200 million working capital facility, which has not been utilized at all. Repayments commenced in January of '23. And that resulted -- the bank debt at the end of the year, we're sitting at ZAR 269 million after payment of the ZAR 134 million. And that has been further reduced by [ budget ] payments since year-end as well. Since the year-end, we're -- not since how we [ had it ] one before, how we [ had it ] into one after a year-end. And the DCP loan is still attracting interest and is the one thing that's really bothering us, but we will be aiming to start addressing that hopefully in the next year as the bank debt has been paid. This loan has been subordinated. Two bank debts, so we weren't able to service that. And the compounding interest is really taking that to levels that is, at this stage for us, unhealthy, but it's still something that we believe we can address in the next 3, 4 years once we've paid the bank debt. Leases outstanding is sitting at ZAR 38 million at year end. Moving on to Slide 13, the trading environment. And first off will be Duan talking about the Cement trading environment on Slide 14.

Thank you, Neil. We are on Slide 14. I think from those trends, it's quite evident that we still have adverse market conditions prevailing. In general, I think our per capita GDP growth has been lagging, and it's really a problem as far as economic growth of the country is concerned. If one looks at some of the IMF forecasts, the latest forecasts, of course, a lot hangs in the balance of what we're going to see unfold politically for the next couple of months, but only a GDP forecast of 0.9% for this year. And taking into account our population growth, which is on average around 1.6% per annum, we're not really improving living standards yet. In fact, it's declined roughly by about 6% over the last decade. I think closer to [indiscernible] as far as consumer spending and how that impacts us as a business, it's also evident that this last calendar year wasn't a particularly good one, only 0.7% year-on-year growth, coming down from 2.5%, which was reported in 2022. And this is really affecting us as far as the demand for building materials is concerned. Graphs on the right, clearly, it also illustrates some of those metrics, as it relates to the affordability of housing and mortgage tax. If we move to the next slide, 15, I think another key aspect that we're closely monitoring, which impacts in our business, is investment levels. As far as the gross fixed capital formation number is concerned, we got excited at one point in the first half of 2023, only to see some disappointing numbers from the second half continuing. Of course, the recent developments on the political front, hopefully, would translate into some positive sentiment and hopefully into a reversal of this trend, which of late, as you can see, it has been downward. As far as the economic sectors are concerned, if we just look at the latest results that we reported for the first quarter of this year, unfortunately, the GDP again contracted 0.2% quarter-on-quarter and 0.5% year-on-year. As far as the construction sub-sector, as you can see right at the bottom, very disappointing numbers. And this trend is really continuing in line with what we saw from the second half of last year, particularly. Of course, these investment levels are still way below where we need to have it, closer to 20% levels, and it's been as low as 8% to 10% in recent years. If we can then move across to the next slide, Slide 16. And it's also something that we're always reporting on, closely monitoring. I mentioned earlier, we have got significant overcapacity in the country. But that notwithstanding, we still see a worrying trend of imports continuing. If we look at the first 4 months, which is again the latest results that are available, it's always at least a month in arrears. We've seen that as much as 390,000 tonnes of cement was imported into the country against just over 300,000 tonnes for the same period last year. Trend continuing, where most of it is coming from Vietnam, and I think the lion's share through the Durban port, which is impacting on some of the markets that we're servicing. As far as clinker imports, I think that that's also something that we felt that we needed to report on. We know one of the local incumbents are also importing probably in view of upgrades that they're planning. So that partly explains the increase that we're seeing year-on-year. So I think overall, a concerning trend that is worrying us as industry, and that we need to find solutions for in terms of maybe setting the -- leveling the playing field as far as issues such as carbon tax, et cetera, is concerned, which we'll report on a little bit later. Thank you, Neil. I think we can then hand back to Kenneth as far as the next section is concerned.

Thanks, Duan. I think I want to just add there, the trading environment is as everybody understands it, it is very tough. Construction has not been easy over the last 10 years. But I really think that we would like to say, very well done to our staff. I mean if you consider the results that we put forward against this trading environment you've just gone through, Duan, I think we've managed to still get a good set of results out of it. Moving on to operational review for Métier on Page 18, some of the things that we had attended to in 2024. We had a plan to expand further in the Western Cape. But because we managed to pick up a couple of other contracts elsewhere, we decided to hold off on that and rather expand our plant network into Kwa-Zulu Natal, on the back of some key projects and some areas we believe are expanding. So we did that instead of going with an extra plant or two in the Western Cape. However, that will be a key focus for us in this financial year. The other thing that we measure ourselves by is the Construction Materials Composite Price Index. That's our own internal measure. We do it because we are always trying to get our margins to improve over inflation and with many different levers that we try and use. And as you can see, that it was 7.2% at the end of March 2024, and we managed on our margins to improve it by up to 13%. And this was done through our product segmentation program that we do. And we also started a product performance enhancement program as well, where we introduced a new information technology system that gives us some edge on how we actually manage our batching performance. And obviously, the more consistent our product is, the more we save on cement, which is a big cost for us. So that helps to improve the margins as well. In terms of health and safety, we had zero operational fatalities and our LTI record was actually better this year than the previous year. I'm going to hand back to Duan just to talk about SepCem.

Thank you, Kenneth. Slide #19, just read back on our focus areas, which we've reported on in our integrated report for the prior year. We've got those four main strategic objectives. The first one was to grow volumes amid these adverse conditions. We're happy to report that we've seen elevated performance on our technical products, specifically targeting some industrial sectors of the market, whilst maintaining, we believe, our share in the retail sector. And that really happens through effective customer-centric partnerships that we are very proud about, and that continued. As far as margin improvement is concerned, I think we did see a decent recovery from a disappointing first half of last year, and that was really characterized by, amongst other things, raw material shortages, inventory constraints. So we've reversed that trend and then reported strongly in the second half. I think driving some of our margin improvements really relates to market intelligence, the application thereof, the altering that in terms of sales strategies and then also targeting high-margin areas and higher-margin segments, which is what we've done, we believe, fairly successfully last year. Again, having said that, continued austerity measures that continued, and this is really something that's imperative navigating through these very challenging conditions. As far as our business continuity, the social license to operate is definitely some -- it's a major focus area for us as a business. We've got some surrounding communities in desperate need. We've been working throughout in partnership with government departments to establish a forum, where we could have high-impact projects fast track and delivered in those communities. And that's an ongoing process, where the main producers in -- specifically the area around the Ditsobotla Municipality have come together to -- with the help of DMRE work on some of the execution of these projects, and that progressed well during the last financial year. Then, as far as I think, operating under these conditions with a very lean workforce, it's imperative that a high-performance culture is entrenched. We've identified this Project Tokafatso, which is really about value creation through employees that continued strongly during the financial year. But also what we have identified is certain skill shortages and specifically as far as engineering skills. We've done a lot of work in developing a strategy to recruit specific positions, junior starters in the industry. And in-house development is something that we feel strongly about. There's a fierce competition for skills, and this is something that we identified the best way is to rather start with young school levers, tertiary institution levers and upgrading the skills through that process on an in-house basis. And then, of course, we continued with our long-term retention program, which we believe is definitely assisting in skills retention. We then can move the slide -- over to Slide 20, as far as post period, first quarter for this year, just some salient points in terms of feedback. We've seen a 2.2% revenue increase year-on-year for the first quarter. Our sales volumes are, however, marginally down year-on-year, and that's really typical for the sluggish environment that we're currently facing. We've really seen relatively low construction activity. This again, first quarter of this year. And especially residential building activity, we've found to be very disappointing. The consumer disposable income has really been under pressure. We reported on that last year as well, this trend is continuing. High inflation rates, interest rates is really putting a lot of pressure on the consumer. And as far as the retail demand is concerned, that is a factor impacting us. And we also, we are happily seeing that the load shedding trends have definitely reversed dramatically. But in the first quarter, it was still definitely something that we needed to deal with. And that impacted most certainly in some of our downstream customer base, which was part of the reason for the performance that we're reporting. As far as our EBITDA is concerned, it however, increased substantially from the prior year, but it's mainly driven by comparative inventory increases and then also savings in variable cost of sales. And with that, I'd like to hand over to Kenneth.

Thanks, Duan. Moving on to Slide 22, just a look at the outlook. We obviously have all had some optimism over the new government, which hopefully will be -- all the negotiations will be satisfactory to most of us. But we still think that for the rest of the '24, '25 year, we probably will have a subdued environment, mainly due to what Duan has already touched on, in the residential demand. It's certainly down. We've -- if we exclude some of the construction infrastructure work, we definitely think that there has been a drop in the construction demand, and all the indicators are showing us that. However, with the new governments in the different municipalities. We are hoping to see that there will be a little bit more spend on the local areas, although we don't expect this to happen in the next 6 months. I think it's going to take some time. Well, certainly, it's given a positive spin on the outlook. In terms of our group focus with regards to Sephaku Cement, one of the areas that we're focusing on at the moment is the Integrated Cement Producers Association, you'll be aware that [ C&CR ] has been closed. And a key area for us is this, because of the impact that the duties are having, the CO2 taxes on our business and some of the other areas that are affecting us, we want to try and get the industry to work towards a greener future. And we believe that it will be beneficial to the entire cement industry. As far as Métier is concerned, we will continue to look at the Western Cape as a growth node for us. We have taken a bit of time to expand our network there, but we haven't been in a hurry. We want to do it properly and make sure that our customers are satisfied with the quality and the service that we're providing to them. We are already participating in a number of infrastructure projects. They're all still coming out the ground. So not a major part of our current sales, but we do see that it will be an area that we will focus on; as well as the maintaining the technical edge, we normally pride ourselves in there, and we focus on it. And then the full implementation of the product performance enhancement program, which we started this prior year. We want to complete that because it definitely contributes to our margins. I don't know if I -- Duan, if there's anything extra that you would like to add in terms of the group focus for the Sephaku Cement or we're happy to move on.

Yes. Happy to move on. Thank you. I think our strategic objectives remain, and you've covered it well. Thank you, Kenneth.

Thank you. So that brings us to the end of our presentation. I think we are going to move on to questions. I see there have been a number coming through. And I think Neil will take us through those questions, and then we'll see if we can answer them as we go. Thank you, Neil.

Thanks, Kenneth. I think we'll first go to conference call questions, and then we'll go to web-based questions.

[Operator Instructions] It seems at the moment we have no questions on the conference call, and I will hand back over to Neil for webcast questions.

Thanks, Rene. Right. I think there's a couple of questions that we've received, mostly Cement-related, there's one for Métier. So I think let's get that all out of the way. Charles from Titanium wants to know Métier results referred to two large projects. Which projects were these? And how significant were these projects to the revenue of ZAR 1.16 billion? Kenneth?

Thanks, Neil. So I mean, we wouldn't want to mention what the value of those contracts were. I think what's important to note that subsequent to that, we knew that, that sector that we're in and that had to do with the distribution warehouses that we did 2 very large projects; we have -- we knew that, that sector was going to be dropping off, and we have focused on other sectors and picked up work, we supplement that. So it's certainly not going to have any impact on our results going forward, because those 2 projects are finished. We have actually picked up other projects subsequent to that.

Thanks, Kenneth. Then we have three questions from Anthony Clark. I'm going to take them one by one, but Duan, you can just deal with that then. First of all, nice results at tough times. Can I ask that the PPC results this week, they stated the domestic market for cement remains very tough, especially in the bagged cement; how is the share between bagged supply versus [ both ], currently?

Thank you, Neil. I think that's exactly what our experience is. There's really been subdued conditions as far as the bagged market is concerned. And what we also reported is in the industrial sectors, we've sort of done a little bit better than that. As far as the overall splits are concerned that overall for the market, I cannot comment for ourselves. It would be in the region of about 25% to 40% -- no, 25% to 35%, I'd say, in the industrial sector versus the balance being the retail. So the retail is still by far the biggest sector nationally, certainly from what our service levels have indicated, but that is really where there's been subdued conditions.

Yes. And really, we are just moving back to what we anticipated when we really [ started at the crisis ]. I think when we built the plant, we thought that we would be looking at a 70-30. And then at some stage, the bags became as high as 80, or 78 at least, but we see no reversal of that. But yes, I think the range that we mentioned is what we're experiencing. The second question is a speculative one on what Afrimat buying Lafarge, and then to increase cement output from 720,000 to 1.2 million tonnes, how do we view the entry into a very competitive cement landscape?