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

Good morning, ladies and gentlemen, and welcome to the Sephaku Holdings Year-end Financial Results for the 12 months ended 31 March 2025. [Operator Instructions] Please note that this is being recorded. I would now like to turn the conference over to Kenneth Capes. Please go ahead, sir.

Thank you, and a warm welcome to everyone joining us today as we give some feedback on our results for the past financial year. On the line with me is the Financial Director of Sephaku Holdings, Neil Crafford-Lazarus; and our Cement CEO, Duan Claassen. We're going to follow our normal format today, and I'm going to hand over to Neil to take us through the financial results. Thank you, Neil.

Thank you, Kenneth, and good morning to all. I'm going to start off with Slide 4 of the presentation. Let's begin with an overview of the group's financial performance for the year ended 31 March 2025. Net profit increased to ZAR 73.6 million, up from ZAR 66.6 million in the previous year. Basic earnings per share rose to ZAR 0.3157, while headline and normalized headline EPS both also saw healthy improvements. Métier's sales revenue edged up slightly to ZAR 1.183 billion from the ZAR 1.164 billion with EBITDA growing to ZAR 146.4 million, reflecting a stronger margin of 12.4% EBIT margin also improved coming to 8.8% on a business unit level, Métier posted a net profit of ZAR 75.8 million. And SepCem, despite marketing challenges, maintained a positive contribution with an equity accounted profit of ZAR 14.66 million, up from the ZAR 14.62 million of 2024. Backing the numbers of SepCem. Sales revenue down 1.5%. EBITDA down ZAR 40 million, but profit after tax flat with an increase of ZAR 700,000, what I mentioned. The clawback in the net finance charges due to higher cash balance and lower debt and a depreciation charge on life-of-plant and ZAR 5 million on tax made up the difference of the EBITDA balancing back to the flat profit. Moving on to Slide 5, financial review, the 5-year revenue trend for Métier. Revenue increased modestly by 2% year-on-year. This growth was primarily price driven as total sales volumes declined by 8%. However, pump volumes rose 15%, highlighting success in segment diversification. A 9% average price increase was achieved through strategic pricing and margin growth through tight product mix control. This disciplined approach allowed margins to grow beyond inflation in every region, reinforcing the resilience of the Métier model. Moving on to Slide 6. Métier's profitability also improved. EBITDA rose by 12% to ZAR 146 million and EBIT up 9% to ZAR 104 million. Net profit after tax grew 10% to ZAR 76 million. These results reflect sustained price increases implemented in January, coupled with continued cost discipline and a focus on higher-value product offerings. The business remains committed to unlocking future margin improvement through innovation efficiency. Strategy remains project margins and growth value-added products. Moving on to Slide 7, the revenue trends for Sephaku Cement. As mentioned on the results slide, faced -- SepCem faced a tougher trading environment. Revenue declined by 1% to ZAR 2.78 billion due to a 4% drop in volumes. Although average pricing improved by 2% to 3%, it wasn't enough to offset lower volumes. The inland market value -- the inland market remains highly competitive, compounded by excess capacity, weak enforcement against substandard products and imports. Sales volume was still below pre-COVID levels. And these market realities underscore the importance of cost control and operational efficiencies going forward. Moving on to Slide 8, the profitability trends. Despite these headwinds, Sephaku Cement managed to increase its net profit slightly to the ZAR 42.6 million from the ZAR 41.9 million of the previous year. EBITDA declined by 11% to the ZAR 321 million as the high fixed cost base and capital-intensive industry weighed on profitability. Equity earnings improved marginally to ZAR 14.66 million. Team is working hard to improve margins through a number of initiatives, including optimized logistics, alternative fuels and targeted austerity measures. Moving to Slide 9, the SepCem cash flow. Looking at Sephaku Cement's cash position, we note that the year-end balances included a ZAR 104 million liability that was shortly paid after the end of the period. Second year of the 3-year loan payment program is now complete and the final settlement date is October of 2025. We've already made another 2 payments in the current year. Shareholder loans stood at ZAR 898 million at the end of our financial year and at ZAR 872 million at the financial year of Cement in December 2024. The financing structure will still -- while still leverage is now stable and the focus remains on servicing debt while funding operations. Just a couple of notes on Slide 10. On the 1st of November 2022, that bullet payment of ZAR 377 million was converted into a ZAR 400 million 3-year loan. As mentioned, the second year payments now being completed. There's still a ZAR 200 million working capital facility available that is unused at the moment. And bank debt principal reduced from the ZAR 267 million at the beginning of last year to ZAR 133 million at the end of last year, currently at ZAR 65 million. DCP loan, ZAR 772 million at the beginning of last year, interest accrual of ZAR 100 million as servicing of this was not allowed while bank loans were still outstanding. It's something that will now start in the current financial year. Balance at the end of December, ZAR 872 million, as mentioned, and ZAR 898 million at the end of our financial year. Leases outstanding was at ZAR 38 million at the end of the year. Finally, looking at the group financial flow. Borrowings increased to ZAR 124 million. That's up by ZAR 65 million largely due to our plant renewal program and a strategic property acquisition. As expected, finance charges rose by -- raised to ZAR 15.5 million. However, our net debt remains below 1x EBITDA, even the gross debt is currently still at that level, highlighting disciplined balance sheet management and a healthy cash generation profile that supports ongoing investment and growth. Thank you. That takes care of the financial overview. I now hand over to Kenneth on the trading environment.

Thanks, Neil. So overall, we see continued pressure on demand for building materials, and consumer confidence appears to be fading following the formation of the GNU. A lot of the retail trade that we saw a slight uptick in has been -- that was impacted by the two-pot stimulus. It seems to be deteriorating. And obviously, this doesn't reflect into good demand for cement. So overall, we see a muted demand. The lack of meaningful economic growth continues to weigh on per capita GDP with sluggish demand for cement expected to continue over the short term. On Slide 14, in terms of the gross fixed capital formation, annualized, we see a contraction by 6.7% during the first quarter of 2025. And again, disappointing for cement demand. Our hopes are pinned on overdue implementation of infrastructure projects. However, the construction pipeline has been receding over the last 4 quarters. And generally, overall, the trading environment remains very challenging for the construction industry. I'm going to hand over to Duan and ask him to talk to us a little bit about cement imports, which obviously impacts our cement business. Duan, over to you.

Thank you very much, Kenneth, and good morning all. We're referring to Slide 15 of the pack. And as always, we share some statistics. We've been talking about the threat of imports for a number of years. If one looks at the top section of this display, it was -- it would be quite evident and clear that there's been a progressive increase in cement volumes being imported into the country. Specifically, if we look at the last part of that top section, we're referring to the first 4 months of this year, 421,000 tonnes of cement have been imported, which is only 2.7% down on the same period last year. Now seeing that in the context of general subdued conditions and in our estimate, significantly up on the general market contraction, especially if one looks at the inland region where there was anomalous weather conditions, it is really a continued threat. Now of that volumes, 87.6% all still came through from Vietnam, which is by far the majority. And of that total import, 76% still came through the Port of Durban. What we're specifically talking about this time around is Mozambican imports, which albeit at a low level, relatively speaking, it was 110% up on the same period last year, worth pointing out and really something that the industry is concerned about. As always, we also keep it on the radar clinker imports. Traditionally, that's all been coming into the country to the grinding operation in the Eastern Cape, specifically in the area of Port Elizabeth. The volumes reported was 195,000. But this time around, there was a little bit of an anomaly in that 28.5% of the total volume of clinker imported came through the Port of Durban. But as you understand, that went through the regional producer, who was busy with a kiln upgrade project, which was nearing completion. And in fact, indications are that this is unlikely to continue during the second half of this year as that plant is being commissioned. As far as the operational review, I think, Kenneth, I'll hand it back to you as far as the next section is concerned.

Thanks, Duan. Just a little bit of feedback on the year that we've gone through. We did speak about it last year about our expansion in the Western Cape. It seems to be going well. We've got a growing customer base. And right now, the Western Cape is starting to contribute towards the business quite nicely. We're very happy with where we're at there. In terms of margin growth, another area that we're very proud of, we measure ourselves against the Construction Material Composite Price Index, which rose about 1.5%. And if you look at the Ready Mixed Concrete Index, which declined by 3.4% versus Métier achieving a 22% improvement in sales margins. We're very proud of that. And a lot of it has to do with our cost optimizations, strategic price management and launching a Métier Build Mix for the residential market. As mentioned about the optimization, we have a product performance enhancement model that we introduced. I mentioned it last year. That has been working well and has contributed towards our margin growth as well. In regards to health and safety, we've maintained a strong safety record with 0 operational fatalities. Another thing that's just for mentioning, a company called PMR Africa that does national surveys on various companies awarded us the recognition that we were voted the Best Ready Mixed Concrete Company in South Africa, which we're very proud of, especially as it reflects the trust and satisfaction of our valued clients. I'd ask Duan to give us some feedback on Sephaku Cement in the prior year. Thank you, Duan.

Thank you, Kenneth. I'm referring us all to Page 18 of the presentation. As far as our feedback, we've set ourselves 4 strategic objectives for the calendar year 2024. As far as delivering quality products, excellent service and customer engagement to drive revenue, we can report back on a number of issues. Firstly, the fact that our technical products performed consistently well, which really gave us positive results. This is despite the general subdued economic environment. As far as the sales of our sought-after high-strength products, that was the second highest year on record since inception. As far as maintaining the market share, we believe we did maintain that in the retail sector from our estimates. And this really happened through customer-centric partnerships. As far as the oversupply and sluggish demand, which we've already mentioned, that is really placing downward pressure on pricing as we could also see manifest in our results. Effective market intelligence, agile decision-making really assisted us targeting higher-margin areas and segments, and that yielded average price increases of between 2% and 3% for the calendar year 2024. As far as our objective to maintain a disciplined cost control and using technology, really a key focus area. I can happily report that our plant variable manufacturing cost per tonne only increased by 1% year-on-year in nominal terms and continued austerity resulted in a 4% year-on-year reduction in our SG&A cost. As far as maintenance downtime, we had that occurred during the second half of 2024. And being a single kiln operation that, of course, will affect the inventory levels as well as the absorption of fixed cost, which had a negative impact on earnings during the second half of last year. As far as our route-to-market distribution cost, that reduced by 5% year-on-year, which really was as a result of benefits that we received from well-developed in-house sourcing optimization models and of course, also some fuel price relief. Another very important aspect for us is preserving our social license to operate. We're operating in the mining environment as far as our carrying operations are concerned, and we needed to effectively communicate with communities also as well as government stakeholders. We're happy to report that we've been working with industry peers to coordinate some infrastructure support delivering community projects, specifically centered around the Northwest province where, of course, we know there are some major challenges. Now the first of our high-impact project to upgrade the Taletso Technical College in Lichtenburg was recently completed and in fact, handed over as recent as literally 10 days ago in June of this year. As far as maintaining a lean organization adequately equipped to achieve continuous performance improvement, we've been mentioning that we have got an employee value creation drive “Project Tokafatso. In this past calendar year, we've really centered around skills development. We've also continued rolling out artificial intelligence, whereas before, we focused on equipment failure prediction, we now also started rolling that out into process control elements. With that said, the next slide is what we always traditionally share, and that's just the cost makeup of our expenses in general, knowing that it is a challenging market and that cost control and austerity is of prime importance. So it's a pretty standard makeup with the one exception if one compares to prior years would be the other element, which is slightly higher than what it used to be. There's a 2 percentage point movement from that, and it's really as a result of inventory movements more than anything else. That was the main driver of that year-on-year movement. This was Page 19 of the pack. If we then briefly touch on the post-period performance, which is the first quarter of this year. This is Slide 20 of the pack. Our revenue decreased by 12% year-on-year for the first quarter. Volumes, sales volumes were down. And it's really, in our opinion, as a result of anomalously adverse weather conditions, which weighed down on construction activity, of course, also exacerbated by what we saw earlier, sluggish economic environment. And we've already mentioned the reasons for that. As far as our quarterly EBITDA is concerned, that increased to ZAR 101 million for the quarter from a base of ZAR 58.5 million in the corresponding period prior year, really as a result of comparative inventory increases. I mentioned the second half of last year, we had some inventory depletions. That was reversed during the first quarter. Our production units did perform well. It's also worth noting that it was further bolstered by a once-off insurance claim settlement from prior years. Thank you very much, Kenneth. I'll hand over to you as far as the outlook is concerned.

Thanks, Duan. And -- so given the environment, we only expect GDP to be moving at about 0.5%. We expect lower inflation and minor interest rate cuts. However, we don't believe this is conducive to construction upliftment. With all the global tensions, government policies, we expect to maintain the low growth rate in the construction industry. And even though there is mention of all these infrastructure projects to fix South Africa, we do believe implementation will be slow and therefore, we will certainly maintain our cost control throughout the following year. With regards to Sephaku Cement, we plan to participate in the industry association to address some of the key issues that we're facing in the cement industry. And we also want to start working towards a greener future for the South African cement industry. Part of this also includes engaging government on challenges that we're experiencing in the industry. We're going to continue to focus on cost controls, as I said, and a strong push to try and maintain our market share in a challenging environment. As far as Métier is concerned, we're going to continue with our expansion in the Western Cape. As I mentioned earlier, it's settling down nicely. And we definitely see that our customers are wanting us to be in that area as well. We also have a focus on securing project work outside of our traditional commercial hubs. Again, this is by -- a lot of it is by invitation to our clients where they want us to bring our technical expertise and our resources to their projects. And then we also want to grow the Métier Build Mix, which is for the residential market. We do supply into the residential market, we always have, but we're going to put a little bit of extra focus on that market as we believe that our Build Mix will be able to offer our clients a very good quality product for their projects. That brings us to the end of the presentation. I'm going to hand over to Neil as I believe there are some questions that have been coming through. Neil, over to you.

Thank you, Kenneth. Just two questions at the moment from Charles Boles. First question, do you have any -- can you provide some detail on the Mozambique cement plant capacity, et cetera? Duan, do you have any information on that one?

Thank you, Neil. What we do understand, look, there's been part of the [ Huaxin ] acquisition was all the assets in Mozambique. There's also Dugongo Cement, who's got a fairly modern integrated clinker plant. So there's significant excess capacity. And what we understand is there's also the likelihood of further expansion into the north of Mozambique. As a result of, I think, this extreme overcapacity, we've been seeing the significant increase in imports -- exports from Mozambique imports into South Africa, specifically the Eastern parts of our country, which is a real concern to the industry. So that is definitely on the radar for the industry to do something about it. So we have initiated a process of applying to ITAC for some relief in terms of antidumping duties. There's been duties imposed on South African cement exported into Mozambique. So we just feel that in order to level the playing fields, we've got to counter that mechanism. So that's as far as Mozambique is concerned. Neil?