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Edited Transcript of AFX.J earnings conference call or presentation 16-Sep-19 8:00am GMT

Half Year 2019 African Oxygen Ltd Earnings Call

Johannesburg Sep 21, 2019 (Thomson StreetEvents) -- Edited Transcript of African Oxygen Ltd earnings conference call or presentation Monday, September 16, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Johann Jacobus Cilliers

African Oxygen Limited - Head of Communications

* Matthias Vogt

African Oxygen Limited - CFO, Group Financial Director & Executive Director

* Schalk Venter

African Oxygen Limited - MD & Executive Director

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Presentation

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Johann Jacobus Cilliers, African Oxygen Limited - Head of Communications [1]

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Ladies and gentlemen, good morning, and welcome to Afrox's 2019 Interim Results Presentation. Thanks for braving the traffic. I see some familiar faces. Welcome. Welcome. If you don't have a booklet, at this stage, if you just raise your hand, we would get a booklet to you.

I also want to welcome our webcast audience. We have seen that audience are growing substantially over the last while, and you are very much part of this meeting. (Operator Instructions) We expect the presentation to take roughly about half an hour. So we should finish about quarter to 2 and then go straight into the questions.

Your presenters today is Afrox's Managing Director, Mr. Schalk Venter; and our Financial Director, Mr. Matthias Vogt. So I'm going to hand over now to Schalk. Schalk, if you can start first. Thank you.

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Schalk Venter, African Oxygen Limited - MD & Executive Director [2]

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Thank you, Johann. Morning, everybody. Thank you for making the time in a difficult traffic, I believe. It was fully packed up and it was like the 7 o'clock (inaudible). Thanks for making the time to attend our half year 1 January to 30 June 2019 results presentation. Those watching us via camera, thank you for dialing in and viewing our results.

So I will take you through the highlights and Matthias will do the in-depth financial numbers. So this investor highlight, which I will do. Matthias will do group finance and operating segments. I will close with key focus areas, what do we do for the next few months of this year.

So just what has happened

[Technical Difficulty]

Okay. We're back. So I think Afrox pleased with the results. I think it indicates and I hope it will indicate to you as well that we are back on a trajectory that we were pre-second half last year, which we stood here and said to you, yes, there's been some events that had an impact on our numbers, last half of 2018. But these results indicate to us that we have recovered.

So our revenue is up ZAR 96 million from volume and price and ZAR 87 million excluding LPG market prices, which, in some instance, is a pass through, as you know. Pleasing EBIT numbers, up 4.8% or ZAR 21 million to the highest -- I had to look back in the numbers, and I think the previous highest was first half 2018, 15%, the ratio. And I think we're happy to report 15.2% EBIT ratio to the revenue or a number of ZAR 457 million.

Headline earnings per share ZAR 1.113 compared to ZAR 1.04 previous year, 6.7% up on 2018 first half. Return on capital employed, and you'll remember in 2015 we started the new part of Afrox, and we promised you 20-plus percent, we're happy to report 21.4% compared to the same as first half last year, 22.7% accounting for IFRS 16. Cash flow is strong, increased to ZAR 485 million cash flow in the first half.

Just a little bit of segmental performance. Atmospheric Gases revenue up 9% -- 9.9% with EBIT up by 18.9%, mostly due to better revenue across the sectors. This also indicate for us better volumes through our ASUs and, of course, the better efficiency coming from those facilities.

LPG EBIT up 1.6% from growth in cylinder business with overall lower volumes. You've seen, and I know Matthias will allude to this, a little bit of a stagnation in industrial LPG, but definitely growth in cylinders mostly for household purposes.

Hard Goods with welding goods and gas control equipment, revenue down 1.2% due to lower customer demand. Now in these presentations, we don't ever refer to the economic conditions, but we could certainly mention the minus 3.2% in the first half, particularly the impact on Hard Goods volumes.

Very pleasing results from our Healthcare business. Investments deliver growth in the Healthcare with revenue in the Healthcare gases up 42% or ZAR 83 million to the prior year. And we're very happy to declare interim dividend of ZAR 0.55 per share for the first 6 months of this year.

Just a comment around safety now. We have our Head of SHEQ, Stephen Moran, in audience as well. We believe that good SHEQ will lead to good numbers because it's disciplining the business. So you can see 2019, 6 recordable injuries. So we're a little bit behind half year numbers or half of the 2018 number. And of course, the major events or security incident trend, you can see the bottom graph. You can see during last year 8 incidents, of which 2 were security-related versus this year 3 and 1. We've had some severe interventions on our plants and our facilities around security because robbing our facilities at gunpoint has become a priority in this country, but we've managed that well.

So you see that total number of recordable injuries continue to reduce. Improved management of SHEQ with proper risk assessments and planned workplace inspections and team communications. Major events at an all-time low. I think that is I mentioned, so good discipline around there.

Last year I stood here -- or February in this year when we announced the full 2018 results, I said to you we will enter this year with a lower cost base, with more efficient facilities, lower cost base in the supply chain especially, better quality business, and I just want to reflect on that. So realignment on human capital, so we've annualized savings of ZAR 95 million from restructure. And we've had cost and efficiency savings around procurement, production and distribution by just doing things differently. So that has certainly supported our numbers.

Same quality growth. We've had 4 months of the full Healthcare tender in the first half of this year. We further invested ZAR 43 million in the period January to June on new installations, cylinder and distribution vehicles. Remember, during the second half of '18, ZAR 95 million was already invested. So I can say to you now that from March 2019, we are getting the full revenue and benefits and volumes of the state Healthcare tender to our facilities.

We have deployed 13,000 of 30,000 integrated valves. So these are valves that go on cylinders using the Healthcare -- oxygen cylinders in the healthcare industry. You can see as example on the top right the cylinders with a white plastic covering the top. These valves have different benefits for hospitals and patients and provides fantastic annuity income for Afrox. So there's still another 17,000 to go.

We've converted 24 public hospitals, about 179 clinics additional since February this year. So I think this is one of our sweet spots, oxygen for hospitals. We've got a strong -- very strong offer to the industry and to the market, and we really focus on that business. I think you can see it coming from this trend, both capital and effort.

And on LPG, we've entered strongly the domestic market through black empowerment resellers taking product to the people, in many instances less fortunate households. We've invested in 55,000 new 5 kilogram cylinders that we recycle through the empowered sellers, and we've invested another 50,000 units for the general market, and there's more to come in the next 6 months. We see strong, good volume growth in domestic LPG offer.

So that is just from me what we've achieved and just a little bit of a strategic feedback. And the message basically is we're on track from where we were end of quarter 1, 2018. Matthias, can you take us through the numbers, please?

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Matthias Vogt, African Oxygen Limited - CFO, Group Financial Director & Executive Director [3]

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Thank you, Schalk. Good morning, everybody. I would like to take the pleasure and guide you through our first half results for 2019. Looking at our presentation and start off with the highlights. Afrox revenue increased by 3.3% to ZAR 3 billion. And that was from a combination of improved volumes in the Atmospheric Gases segments, mainly as a result of the growth in our Healthcare business, the growth in LPG cylinder business and obviously the recovery of cost inflation, which then transforms into better pricing.

If you look at our operating profit, it improved by 4.8% for the first 6 months to ZAR 457 million. Our operating margin improved by another 20 basis points to 15.2%, whereas our EBITDA could improve even by 6.3%, which demonstrates a further margin for above 22%. Operating cash flow improved by 109.1% after adjustment for working capital. Our headline earnings per share improved by 7% to ZAR 1.113. Earnings per share went up by 6.7% to ZAR 1.12. Our return on capital employed was reported at 21.4%, which is 130 basis points below the previous period. However, if you adjust for the application of IFRS 16 in our 2019 numbers, our return on capital employed has been reported at 22.7%, means at the same level as previous year.

If you look at our cash flow statement. Our operating cash flow of ZAR 485 million has improved by 109.1%. If you look above, the consumption of working capital has been significantly less than it used to be in 2018, and that's clearly from improvement in working capital management. We need to consider that we have grown our revenue. We have gained some businesses. I think that's quite a respected number in the current conditions. If now we look further down at our free cash flow, it has improved by 132.4% to ZAR 69 million, and ultimately cash at the end of the period was at ZAR 1.222 billion or 8% up on prior year.

Looking at the ratios, net debt/EBITDA is currently (inaudible) at 0.2. Means we are in a position to pay back our debt in a fairly short time period, as well our return on capital employed has further improved and is stabilizing at 22.7%, which is in line with our market guidance of the last years.

In order to understand the EBIT performance year-on-year in a better way, we always share with you our EBIT development or EBIT bridge. This time it goes from June 2018 to June 2019. Again, price/volume was the main contributor through this good performance year-on-year. And cost inflation, which has been lower than that, obviously indicates a positive price-cost recovery for the 6 months' period. Efficiencies further contributed to these positive results as a result of our restructuring efforts, but as well of procurement and other operational efficiencies.

We have been again confronted with several headwinds. Obviously, the political and socioeconomic environment has further deteriorated for the first 6 months. As well, we had some currency effects of ZAR 29 million going against us, which we find in our corporate costs and further bad debt write-offs, which we had to incur due to distressed debtors in the first 6 months. Supply constraints in DA added to that headwinds and we are not expecting that those supply constraints will reoccur in the next 6 months.

Looking into the operating segments. Before we do that, the total group revenue, as mentioned, has been grown by 3.3%. Now considering the combination of our operating segments, Atmospheric Gases, LPG and Hard Goods, we see that due to the contribution of the new Healthcare business, the segment, Atmospheric Gases, has further gained in the total portfolio to now 47.9%. It's very pleasing. LPG is sitting for 2019 at 38.8%, still growing on the line and Hard Goods at 13.3%.

If you look at the profitability of the segments, we see a similar picture. However with Atmospheric Gases over-proportionally contributing to our profits with 53.9% of the total group EBIT of ZAR 547 million (sic) [ZAR 457 million]. Further on the LPG business, 34% and Hard Goods, 12.1%. Again, the increase in corporate cost is due to the effect from translation effects from foreign currencies.

Let's have a more closer look to the operating segments. Atmospheric Gases could deliver a growth in its revenue of 9.9%, clearly driven by the new Healthcare business. However looking at its EBIT performance of 18.9%, we see a significant jump in profitability of 21.4%, which as well talks to restructuring efforts and better purchasing and operational efficiencies.

Whereas LPG had reported a decline in its top line, which is mainly due to industrial customers taking less volume than in the previous period. However, we will see later in the slides that we have an increase in our cylinder volumes, which is pleasing as that as well relates to the recent investments in that business. On an EBIT level, we have a small growth of 1.6%, however with much better profitability now at 16.7% for the first 6 months.

Hard Goods business, remained more or less at the same levels as for the previous 6 months. Considering the underlying conditions and its exposure to the economy, manufacturing, mining, construction, we still believe that, that are reasonable results in the environment and looking at the profitability of now 17.4%. Even though it is a decline compared to the prior year, still talks to the high levels of profitability in such sector like manufacturing for Afrox.

In Atmospheric Gases, our overall revenue improved by 9.9%. If we look at the detail, we see that Healthcare underlying was growing by 42% from ZAR 197 million to ZAR 280 million. Our cylinder business has been growing by 3% to ZAR 566 million, whereas our bulk business has grown by 6% to ZAR 509 million. Our on-site business has been increased by 8%, which is largely due to electricity price increases, which we pass on to our customers where possible.

Looking at the market sectors, most market sectors show growth. Clearly food and beverages with 6%, which reflects a lot our CO2 business. Petrochemical has grown by 1% due to the ongoing maintenance in some of our customer, steel industry, 3%. It relates to argon and higher volumes in the bulk business. Mining slightly up from a low basis to ZAR 107 million and Healthcare gained 42%, whereas automotive, manufacturing and construction have been down, which is not a surprise. As already indicated, those sectors are currently reporting reduced volumes within their own industries on an ongoing basis. Our other bucket, which contains paper and other industrial customers, could grow nicely by 8% to now ZAR 347 million.

LPG. This slide on the operating segment, LPG, is demonstrating a very comparable growth. Means we are taking out any ones-off bulk trade we do in the respective years. There you see now that our total revenue within the Afrox group in LPG has been declined by 2.4% to now ZAR 1.165 billion for 2019. Again, that reduction is largely due to the industrial customers taking less volumes, which as well talks to in part automotive, but as well to construction and manufacturing.

If we look on our volume performance, we had good growth in 2017 to '18, which already was in the main driven by our cylinder business. And if you look now from 2018 to '19, we clearly see a continuation of this positive trend, although the industrial volumes in the bulk volumes have been reduced, which gives, in total, lower volumes than at the previous period.

When we look at the imports versus the local refinery offtake from Afrox, we clearly see that we further have increased our imports through the Richards Bay facility. Now 35% of our total volumes we import are going through that facility, and we expect it to increase further.

Looking now at Hard Goods. Hard Goods again confronted with lower demands across key sectors. However, good price cost recovery as we have to deal as well with imported goods at various cost levels. For example, for raw materials show that our top line revenue has only declined by 1.2% despite lower volumes in all areas. Hard Goods is a segment containing largely of welding consumables, gas regulators equipment and safety devices like the safety device for deep level mining.

That development, again, was largely driven by the reduction in demand for mining, manufacturing and construction as it was in previous periods, if you remember. The service of the installed bases of our rescue packs for deep underground mining is carrying on and gives us stable revenue from service business. And industrial gas and regulator business, obviously, as well is linked into the overall trends, so no different development here to be reported.

If we look now in the market sector development, we see clearly that due to the ongoing maintenance in the petrochemical industry, we have nice growth in volumes. However, if you, for example, look into manufacturing or retail trade, which is a clear link into the direct customer business, has shown strong reductions, so has construction by itself.

That's it from my side. Thank you very much for your attention. I would like to hand over for the key focus areas back to Schalk Venter. Thank you.

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Schalk Venter, African Oxygen Limited - MD & Executive Director [4]

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Thanks, Matthias. Okay. Thank you, Matthias, for that. Let's just have a look at the few key focus areas that we have for the next few months. So we want to strengthen our Hard Goods. And we are busy with some projects, and hopefully we'll be able to in the next few months be more public on this. We still see a good market for that in Africa. And as you know, Afrox is well presented in Africa across a number of countries and subsidiaries. Improve our asset utilization, which we've improved significantly over the past few years and continue to do so. And continue growth in LPG, which is now -- that's a core market for us. I think you've seen from my presentation and from Matthias' comments as well, we see certainly a demand and a possibility of growth in the household-type applications. We also got a strategy to improve that into Africa with the large demand in some of our neighboring countries as well. And then, of course, continue the growth with the Healthcare business.

We've been successful with this standard. We see further growth in Africa as governments and foundations like the Gates Foundation roll out new wings to hospitals and new hospitals even. We are well positioned with our Africa footprint to grow into those areas. Also the other 17,000 valves or IVR valves, integrated valve regulator, that we'll see getting into the market. Orders are placed. We just -- as delivery comes in, we convert and then get to those hospitals. As I mentioned to you, a fantastic product with great income and profitability.

Those will be the key focus areas for Afrox for year-end. So that concludes, I think, our presentation, Johann. Is that correct?

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Johann Jacobus Cilliers, African Oxygen Limited - Head of Communications [5]

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Yes. Thank you. Ladies and gentlemen, you've just seen the 2019 interim results. A lot of content, lot of detail.

(Operator Instructions). No questions? Schalk or Matthias, any further comments you want to make in closing there? No? Okay. Ladies and gentlemen, this then conclude our 2019 interim presentation. Please take a moment to complete the survey on your desk and feel free to have some refreshments afterwards. Thank you.