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

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

Thank you. Good morning to everybody and welcome to the presentation of our half year results. We're glad to have you all here as we reflect on the first 6 months of the year and discuss our achievements, challenges and look forward to the opportunities ahead. I'm Kenneth Capes, the CEO of Sephaku Holdings and Metier Mixed Concrete; and I have with me Neil Crafford-Lazarus, our Financial Director; and Duan Claassen, our CEO of Sephaku Cement. We'll take you on a review of our financial performance, some of the key developments and maybe a quick overview of the market that we're currently operating in. So if I could ask Neil to dive straight into the financial results. Thank you very much.

Thank you, Kenneth, and good morning to all. I'm going to start right with Slide 4 -- really Slide 3, the financial review headings and then the financial review on Slide 4. Ladies and gentlemen, the SepHold results on the left hand column. Earnings per share went up from ZAR 7.74 to ZAR 13.1. That's an 80% increase because of a fairly low base that we're comparing with. HEPS very similar, ZAR 7.54 to ZAR 13.78. The net asset value of the per share went from ZAR 467 to ZAR 538 and that's basically 2 contributors. One is the increase in earnings that you've seen above and then the second one is the further buyback of shares. We have at year-end bought back -- we're sitting with 240 million out of the 254 million shares and we've reduced that further down to 231 million. So we now have 22.7 million shares that we have as treasury shares in Metier. The SepCem accounting profit of ZAR 1.5 million, a turnaround from the loss of ZAR 14 million in the first half of 2024 calendar year, which is reporting period for then. We'll have a look at the breakdown of that in the third column just now. Profit after tax, therefore, up from ZAR 19.7 million to ZAR 32.6 million, 65% increase. Having a look at the Metier results. Slight decrease in turnover, ZAR 626 million went down to ZAR 613 million, a 2% drop there. Correspondingly, a 2% drop on the EBITDA level as well coming down from ZAR 70.3 million to ZAR 69 million. EBITDA margin constant at 11.2% during the 2 periods. Depreciation went up slightly because of the renewal of fleet during last year, which we reported on in our full year results. So EBIT from ZAR 52.3 million down to ZAR 48.8 million, a little bit more than just ZAR 1 million movement that we saw on the EBITDA level. Profit after tax back to a ZAR 1 million difference, down 3% from ZAR 37.8 million to ZAR 36.6 million. On the cement side, turnover from ZAR 1.24 billion, up 5% to ZAR 1.3 billion resulting in EBITDA moving up ZAR 40 million and also the margin going up from 8.6% to 11.3%, a 37% increase on that level. EBIT have the same result in the differences as the depreciation would be fairly stable between the 2 periods so an increase there from the ZAR 14.2 million to ZAR 60.9 million from 1.1% to 4.8%. Profit after tax, the turnaround from the ZAR 39 million loss last year to a ZAR 5 million profit in the current period. And that ZAR 5 million is carried on to the 36% interest in the first column, the ZAR 1.5 million that I referred to at the start of the presentation. Moving on to Slide 5, looking at the volume and pricing breakdown of the revenue that Metier realized during the period. Our comparison is a 6-year comparison purely because 2019 was really the year in which matters slowed down substantially. I think overall, if I remember correctly, we had about a 13% reduction in demand during 2019 from the prior year. So that was a first turn. And then of course we had the COVID year after that and then the gradual recovery from there. So revenue well above the 2019 levels over the last 3 years, but for the last 2 years now fairly flat, the ZAR 147 million and the ZAR 144 million that we spoke about on an indexed basis. And then as far as the pricing and volumes is concerned, a further increase in pricing, but volumes showing a reduction of about 12% during the current year. And then I think when Kenneth talks about the environment and so on, we actually saw that it was even worse in the Gauteng area. The reduction was a little bit mitigated by work generated through the Sanral road projects on N2, N3 where we are heavily involved in KZN so that balanced it to a certain extent otherwise we would have probably seen figures in excess of the 12% that we're currently reporting on. Pricing went up by 11% and, therefore, a not too severe move on the revenue, only 2% down from that side. Moving on to Slide 6. The results again I think are representing the trend over the last number of years since 2019, 2020 still very comparable with the COVID numbers and then increased pricing and product mix supporting profitability since then. Looking at the current levels, although everything slightly down from the last year, still satisfactory levels and good numbers overall. Gross profit ZAR 226 million against with a 3% down; EBITDA, 3% down to ZAR 69 million; EBIT down 6%; operating expenses due to cost control down 3% as well and then a 2% drop in the net profit to ZAR 37 million. Having a look at the cash flow and we refer to the SepHold cash flow because Metier is a 100% wholly owned subsidiary and, therefore, the cash reported in the consolidated financials is for the 2 companies and that is what is reflected here. A opening balance of ZAR 13.4 million; generated by Metier during the period, ZAR 60.3 million; some interest income of just below ZAR 1 million; taxation paid of ZAR 5.9 million; and then CapEx net of disposals, ZAR 53.2 million. Lease liabilities, principals and interest repayments of that came to ZAR 10.669 million. I did mention the treasury shares that we bought, ZAR 9.6 million was spent on that in the current period, ZAR 13 million before year-end last year. So just over ZAR 24 million that was spent on the acquisition of shares, the 22.7 million that we hold. Then there's a ZAR 12.8 million, which is the proceeds that we received on expenditure that -- on CapEx that was previously been reported as work-in-progress capital during the previous period. So that was work-in-progress capital spent in cash. But then once the plant is completed, the bank finances that so it stays in PPE, but it is now being financed and that ZAR 12.7 million was that amount received from the banks for the financing of that plant going forward. So this resulted in a closing cash balance of ZAR 8.139 million. The financing of the PPE is also the only debt that Metier currently has. The term facility that we had, as we've mentioned and reported on before, was paid in the previous financial year already. And Metier then negotiated an overdraft facility of ZAR 80 million, which we've reduced to ZAR 40 million in the current year because it's very seldomly utilized, only over month-end when there's a big mismatch between paying the creditors and receipts of debtors. We have an asset finance facility, which is more than 1 facility from different providers, which is currently 70% utilized. Moving on to Sephaku Cement numbers. Again the 2019, the first year that we had after a couple of good turnover years leading up to 2018. As a comparative, 2020 down on revenue, but even then we saw increases in volume as that second half of 2020 saw big demand for the reasons that we've discussed previously before. But unfortunately, that level of volumes has been held over the last 4 years and you only see a slight increase on the index number of volumes going up from the 102 for last year to 103. Pricing, also only a slight recovery or a slight increase of between 2% and 4% depending on the mix resulting then in the 4% increase in revenue now reaching the ZAR 130 million compared to the ZAR 100 million 6 years ago. Moving on to Slide 9. The loss made last year that we also reported on, the ZAR 40 million loss, the 1 number under the 0 line there, the rest of the years fairly comparable. I think there was that increase in 2022 that's a result of again the drop of '23. Again stock accumulation is always something that plays a part and you see 1 year being slightly more positive and then the next one more negative again. I think the stoppages that was required in 2023 just exacerbated that and when we're looking at the forecast or the outlook we're reporting in the third quarter, you will see that there were some stoppages post the half year, which also impacted on the results and the profit that was reported on for the first 6 months being neutralized in what has happened in the period between June and now. So just a summary of that. We saw a 37% increase in EBITDA to ZAR 146 million, input cost increases not fully recovered through pricing. It's been the problem as we saw in the previous slide as well, price increases been 2% to 3% and topping 4%, not really covering inflation at all. And then a substantial increase of course in EBIT. But as I said, on a very low level, those percentages seems to be much larger than what it really is. Moving on to Slide 10. Opening balance of cement was ZAR 419 million and I think we've mentioned that at full year results as well. When we looked at the interim period, there was a creditors payment of ZAR 200 million that only went through on the 3rd or the 4th of January. So that overstated the opening balance by ZAR 204 million and it is, therefore, better to compare not the ZAR 419 million; but the ZAR 419 million less ZAR 204 million; ZAR 215 million versus ZAR 218 million as a result of the current period. Cash generated by cement, ZAR 90.7 million. Tax paid ZAR 8.27 million again of profit last year. Tax paid is a function of the 20% of income that you need to pay tax on where the utilization of your [ cess ] loss is limited to 80% of the taxable income reported before the utilization of the cess loss. That's where there was a tax outflow. Net outflow for PPE, only ZAR 19 million. Net finance cost, ZAR 5.8 million. Lease payments, ZAR 7.3 million. Dividend paid that is by the subsidiary to the operating the Sephaku Development, our mining company, has got a BEE shareholding where the community participates and that is a dividend paid by development, which is part of the consolidated results of SepCem. Loan payments during the year, ZAR 67 million, closing the 6-month period then with ZAR 219 million. Moving on to the trading environment and I'll get the frog out of my throat and give the other guys a chance to speak.

Thanks, Neil. Looking at the trading environment. Building and construction continue with adverse conditions. If you look at all the charts, the subdued SA GDP growth trend continues. Consumer spending, notably in hardware and paint and glass which is a proxy for retail cement demand, is down. The trend is still down. Residential building trends showed a slight uptick in the nonresidential plans. But just generally speaking, the building plans have been continued on the downward trend. Obviously the positive side there is the change in the interest rates and hopefully that will continue to get better. I haven't got the graph on here, but one of the slight upticks comes from our civil construction industry where we have seen a turn for water projects and road projects, but clearly not enough to drive the entire industry. We still need a lot more investment there. That's Slide 12. Moving on to Slide 13. Just to give you an idea of the business confidence index, which is also a leading indicator, which has turned up. And some of the forecasts on the GDP and investment and employment, the forecasts are now showing and I think the GNU has a lot to play, a role to play here and certainly positive sentiments are coming through. Clearly we're expecting a bit of a lag between confidence and an actual uptick in the numbers and we hope to see lot more investment in the next 12 months. Moving on to Slide 14 where we're looking at the trading environment for cement imports. I'm going to hand over to Duan and ask him to take you through that slide.

Thank you, Kenneth. Good morning, everyone. Yes, Slide 14 as Kenneth alluded to. I think we've been talking about imports for a number of years being a real problem for the industry. A number of reasons. Firstly, we believe that there's evidence of dumping. And secondly, because of all the country-specific issues related to cement production, mining charter, payment of carbon taxes and the likes; we don't believe the playing field to be level. That said, I think it's once again another year where we're seeing significant increases in imports. If one looks at the year-on-year comparison January to September, 849 kilotonnes as opposed to 766 kilotonnes for the same period last year. Imports still coming mostly from Vietnam and the lion's share of that through the Port of Durban. What we're seeing of late is also a little bit of an increase from Mozambique, which is again a concern for industry. And we're also just quoting some of the clinker import numbers, which mostly goes to Gqeberha, which mainly services the production facility there. I think of concern is if one looks at the corresponding period, we've been reviewing the period 2019 to-date. In that period I think overall imports increased by 2% compound annually and that's definitely not what we're seeing the market doing in the corresponding period. If we look back at, when Neil referred to the 2018 year is when we saw last significant performance in terms of volumes we have; if that is a comparative assessment period, then imports grew by 2.5% compound annually. And if one looks at the imports through the Port of Durban for that, it's a 4.5% compound annual growth rate to date, which has resulted and I think imports in our assessment, becoming a major part of the total market supplying cement in South Africa. Then we're going to move over to just the Metier operational update, Kenneth.

Thanks, Duan. Just having a look at the focus areas for 2025 that we set ourself. One of the things we've spoken about for the last 2 years was the increase of the Metier plant network in the Western Cape. We have now secured the second plant; it's up and running, it's batching, it's supplying the marketplace. And we have secured a third site as well. So we're going to continue with our planned footprint for the area. We do believe that it will balance out our portfolio throughout the country and set us up in the 3 major regions. The next one was the growth in margins above the construction materials price indices. Year-on-year as at the end of June, the CMPI was sitting at 5.6% while the Metier margins improved by 20% over the same period. A lot of the margin growth has got to do with our PP program, our Product Performance Program as well as the product split and the specialized products that we're supplying. So the Product Performance Program has certainly played a good role. Obviously we continue to monitor that now. We have managed to eke out the savings there and now we just adopt a proactive approach through the use of some [ AR ] graphs that we use. And in terms of health and safety, we obviously set our goal of 0 operational fatalities and we continue to do well on our health and safety statistics with 0 operational fatalities. Moving on to the SepCem operational update. If Duan can just keep us updated there.

Thank you, Kenneth. I'm referring to Page 18 of the slides. So we're now looking at just a post-period update up until the end of the third quarter of this calendar year, also our financial year. We'll see that we're looking at sales revenue fairly flat, only a 0.5% year-on-year increase. So it's really a slight decline in volumes, which is conducive to what we've been referring to on the macro environment offset by some nominal price increases that we've managed to secure for the 9-month period, which is having a net effect of a 0.5% increase in revenue. Similarly, in terms of EBITDA, comparatively flat against prior year and also was a slight reduction in depreciation. We had closed some of our loss-making transport division. Therefore, a slight reduction in depreciation and therefore, a slight increase in EBIT on the comparative period. If we then move over to Slide 19, we just look at our net debt position. We've got a 3-year term loan with the banks. That has reduced in capital balance from ZAR 269 million up until the end of the third quarter, we're sitting at ZAR 168 million and as current, we're sitting at ZAR 133 million after a quarterly payment at the end of October. Our bridging facility increased from ZAR 772 million and as at the end of September, that balance was ZAR 847 million. With leases, that reduced slightly. I referred to some of those transport assets. So that reduced from ZAR 38 million to ZAR 33 million. Leaving our total debt reducing from ZAR 1.079 billion up to ZAR 1.048 billion at the end of September. And with the cash on hand being ZAR 323 million at the end of September, that leaves us with a net debt position of ZAR 725 million. Then I will move over to the outlook and I'll just talk about the cement elements and then I'll hand over to Kenneth. And this is Page 21 of the presentation. So clearly not a conducive market to a lot of cost that we can afford. So it's really subdued. Having said that, we need to look at our cost base. We will be focusing on continuously increasing the use of alternative fuels. We've had some benefit in terms of the softening of energy prices, specifically coal, which has helped offset some of the adverse impacts that we're seeing from the national utility increasing electricity tariffs in high double-digit numbers annually. We'll also be looking at, therefore, cost control and optimizing to navigate through this adverse environment. What we're very excited about also is the introduction of artificial intelligence specifically aiming at optimizing process control. We've been employing artificial intelligence in some asset management in terms of machine reliability and condition monitoring, but we're also now looking at rolling it out in terms of process control. And lastly, skills development is a major focus area. We're operating our plants in areas where I think local government and municipalities are not really performing. And so to attract talent into those unattractive areas is a major challenge and what we are going to focus on is to develop skills internally to the best of our ability. That's just the outlook. Over to you, Kenneth.