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Edited Transcript of MTA.J earnings conference call or presentation 14-Aug-19 8:00am GMT

Half Year 2019 Metair Investments Ltd Earnings Call

Parktown Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Metair Investments Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Cornelius Theodorus Loock

Metair Investments Limited - CEO, MD & Executive Director

* Selvin Konar

Smiths Manufacturing (Pty) Ltd. - MD

* Sjoerd Douwenga

Metair Investments Limited - CFO, Financial Director & Executive Director

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Conference Call Participants

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* Christina Steyn;Absa;Investment Analyst

* Hazel Khumalo;Absa;Analyst

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Presentation

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Selvin Konar, Smiths Manufacturing (Pty) Ltd. - MD [1]

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And a warm welcome to you from all at Smiths Manufacturing. I'm Selvin Konar. I'm responsible for Smiths Manufacturing. It's certainly our absolute pleasure and privilege to welcome you to Smiths Manufacturing as the host of the results presentation. A warm welcome to the CEO of Metair, Mr. Theo Loock; the CFO, Mr. Sjoerd Douwenga; and the management team of Metair. We have various delegates in the audience today or protocol observed on my side. We have investors, investment analysts, the banks and the University of the Western Cape. Thank you very much for your attendance. We have Instinctif Partners and [Corp Chem], group managing directors and associates of the organizations. Ladies and gentlemen, a warm welcome to Smiths Manufacturing once again.

As your host, your security and safety is very important to us at Smiths. If you hear a 2-minute continuous siren, it means that we have to evacuate immediately. So please proceed to the aisle that you've entered the building in. You can either decide to exit left or right. The assembly point is behind this building, where we will account for every visitor, associate and contractor on site. Your safety is first, last and always at Smiths.

The next speaker needs no introduction to you. However, I just thought of mentioning that he was the first recipient of the Transformation Award issued by [Terra] South Africa from a Metair perspective and receive the President's award for his contribution not only to Terra but to industry at large. Please join me in welcoming Mr. Theo Loock onto the stage.

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [2]

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Thanks, Selvin. Good morning, everybody. Welcome. Just for our guests that's on the webcast, we hope you all have downloaded from all the www.metair.co.za the presentation that you need at hand. As always, we say our results are best understood in conjunction with going through the presentations. Today, they are quite involved. These various presentations is the presentation on the results. There's the presentations from the individual companies, then there's 2 technology presentations that's sort of addressing the issues of the shifts that our industry is experiencing, and then there's also the exhibitions hall next door.

So please, to the participants on the webcast participation that you're not here, there might be a little bit more information like your safety. Safety is very important. So please always remember to you the protective closing that we will give you and man-machine separation. When you walk, always keep to the hallways. Please do not touch the products. Some of them are warm. Some of them are sharp and ask if you want to investigate anything. We're there for your safety.

So in today's that we wanted you to enjoy yourself, so please interact with the team. And then the third one is we want you to have a good understanding of not only the results, but also Metair when you walk away today. So yes, it's a little bit complicated presentation. It's not just on the results. It explains Metair.

So let's start with the welcome. That's a warmer welcome now to all of you since we switched off the aircon. And to all of our shareholders, you'll see that there's been a big focus especially since the last year, since the disappointment of us not being able to execute on the top acquisition, a focus on shareholder requirements and for us aligning ourselves not only with you, our shareholders, but also with the industry as we experienced a lot of shifts in our industry that we will explain to you.

So to shareholders, special welcome. This is especially for you.

Just if I speak to the display a little bit. The exhibition next door. So you'll start with Hesto as you enter. Hesto, we want you to see the transgression of value up -- or the transition of value up product. The Metair result, we are very, very grateful to bring a good result to you, but that result is because of value up and volume up. So volume up, everybody understands, but value up opportunity is something that we want to display with you today in the exhibition halls.

And for instance, I think the Hesto displays the easiest one that shows it because you can see a model T Ford wiring harness with 7 wires in it to an engine wire harness today got 600 wires in it, and then the engine harness is only -- wire harness, is only 1 of 8 harnesses in a vehicle. We can put up to 3.5 kilometers of copper wire in a vehicle today as the technology is shifting to better communication, better control, autonomous driving sensory. So it does explain the technology shifts as well as you go through the process.

Then you'll see the plastic parts, plastics from automobile in the display. So the Hesto team, just John and the team, just put up your hands. So the Hesto team, John and his team, will you please speak to them? [Stephen Geller], [Shakur] (inaudible) They're all here. This gentlemen there at the back that you can speak to is pleased to explain Hesto to you.

Then plastics, William, the MD, William and his team. Plastic parts are becoming more important as vehicles become heavier. So speak to William about the technology in his business.

Our aftermarket guys, they're next to them, ATE. Where's Gary and Johan and there -- (inaudible) Guys please speak to them. They're sort of the most competitive agent aftermarket, 134-plus different brake pad brands available in South Africa. So they're the front end of our business when it comes to customer liaison and understanding the aftermarket. So speak to them about their business.

Another business then between them and Lumotech is our CSI projects. Take a few minutes. Stand at the 4 TV screens, and see what Metair invest in our community and the development of the people and our focus on education.

Then Lumotech, big value up. Lumotech will show you the new light sources. Lumotech, for those of you that participate in the site visit, will see a lot of construction going on in our lighting business site at the moment as we're expanding volume and value opportunity. The value of headlights are increasing tremendously, and part of us being able to today pronounce to you that we've had almost ZAR 1 billion increase in turnover and ZAR 900 million. All of the individual companies that I'm talking to has experienced record turnovers in the 6 months of the results that we brought, and that's, again, the combination of volume and value up.

Then Unitrade, where we make the copper wire, still too thick for us. [John] speaks to manufacturing excellence, sitting over there, together with (inaudible) Where is (inaudible) ? Speak to him. They'll tell you about copper wire. We try and pull it like 2 [stalks] as thin as we possibly can, but also to be on the tolerance limit. So we make some decent margin in there, but a very important part of technology transfer.

Then when you go to Supreme Spring, with the teams, [Bonnie] and [Mark] over there. Speak to them about the technology change. As vehicles become heavier, it's more expensive steel and more high tensile steel is being used. So speak to them about the technology developments in their product, also a big value up of them. They got Ford as a new customer. In the Ford Ranger, we like the light commercial vehicles because the heavier the vehicle are, the more difficult your ride control is, the more expensive products we sell into the market. So the shift in the South African market from passenger vehicles to light commercial vehicles speaks very well towards localization and expansion opportunity especially in the steel application.

Then one of the more complicated products, Smiths Manufacturing guys, Selvin and his team. They'll put up their hands. Just all of them over there, even (inaudible), thank you very much for coming back from Japan. He's just brought his family from Japan, relocating here to South Africa. He's our DENSO representative.

We've got Selvin over here. Speak to Selvin and the team. They will show you the aluminum products in the heat management that we do in a vehicle.

Then we've got our overseas team next to them, [Juan Repide], and Adrian. Adrian is our specialist in lithium-ion. We like to hire the tech entrepreneurs. Adrian is a typical tech entrepreneur, likes the advancement of the world. Prime Motors has progressed from Prime Motors where we focused on the conversion of internal combustion engine vehicles to electric vehicles to prime batteries where the technology behind the battery and the lithium-ion technology and the value opportunity that it has for us in the future is very important. He's also responsible for identifying our first investment in lithium-ion. He's made a big commitment to us the [1st] of November, we will open our lithium-ion cell producing facility in Romania. Adrian runs it for us from a technology input point of view. So all the product development that's done in Prime Motors or in Prime Batteries, but the physical manufacturing transfers to Rombat. So Juan Repide sitting next to him, responsible for Rombat in Romania, but he's also the owner of the lithium-ion investment. And why that is important? We want Adrian to focus on the development of the product. But when it comes from a manufacturing expertise and be able to deliver customer demand like Porsche's requirement on a starter battery, that will transfer to our manufacturing environment.

Then you've got ABM next to us, a little bit in Kenya, understanding Kenya has a lot of solar panel and energy storage opportunity. The FNB team will speak to you to that. And then Mutlu, there's Achim. He's lonely here, so please visit him. Unfortunately, or fortunately, it's Bayram holiday in Turkey. So he couldn't convince any of his members. Very good upwards delegation. So Achim is here, but a good performance from Achim. He beat currency devaluation of 15% by 54% better performance in Turkey. So Achim, thank you very much to you and your team.

And then in the center of the presentation is First National Batteries, and there's a reason for it. Number one is the transparent display. We want to be transparent about our performance. In FNB, a lot of you, our shareholders, only got interest in FNB. Many of the shareholders are only visiting and some of you on the webcast now, only visiting the FNB and there's the perception that FNB can be 2, 3, 4x the size. It's not physically possible. We've put the capacity constraints on there. We only produced 2.2 million batteries at FNB. So only so much money that you can make on one battery, unless you got value upliftment opportunity. So what's value upliftment opportunity for us? If we were to replace a lead acid battery today that starts a vehicle from lead acid to lithium-ion, it's a 10x value up opportunity. So we will sell a lead acid battery between EUR 25 and EUR 30. We'll sell a lithium-ion battery between EUR 250 and EUR 300 to do the same job but in a different operating environment. So the technology conversion opportunity for the same value is 10x.

What does it mean in Metair and the energy vertical? If we just convert 1/3 of the battery supply that we do to the OEMs to lithium-ion, we double the size of the energy vertical every time we have the technology stable, and that's a big portion of the technology presentation that you'll see today.

So FNB, speak to the team. Where is Russell? So we've got 3 specialists, 4 specialists there. We've got Russell. He runs the operation. We've got Dr. [Philian Hoover] who's our resident specialist in nanotechnology and can do all the chemistry analysis for you if you want to go to nanoparticles and periodic table understanding of the chemistry involved. Murray, who's responsible for the customer-facing side of our business; Ryan, who's responsible for our franchise management in the battery center franchise because it is effectively a retail operation. So please take the time today to speak to them and understand our businesses.

So if we can go, just to thank you, each of those individuals. It's not possible for Metair to bring a result that's 20 or so percent up without the contribution from the individuals.

So what we also have here today is a big Metair contingent, but I don't think we had Metair (inaudible) crowd here. It's not that. We also see this as an opportunity for them to understand your requirements as a shareholder.

And last, not least, there's some independent Metair Board members here, and I can just put up the hands. I see Billy is coming, Billy Mawasha; Michael; Manfred Muell and [Nolu] Welcome. It's also part of the process for them to interact with our shareholders. Some of our independent Board members are also shareholders in the business. So you can speak to them from a shareholder perspective, but also for you and for the management team to interact with them. So we see this as a cross-pollination.

So thank you, and a warm welcome to everybody. It's with great pleasure that we bring this result to you.

Just to go through the day, the insert today, it's got 4 main elements. And so our presentation on the results, there's the 2 of the Smiths Manufacturing facilities. There's the technology presentations, 2 of them: What's technology shifts doing to us in our Automotive components business; what's the opportunity with lithium-ion in LED and what is the comparison between the 2 in the energy vertical. And then we do an automotive plastics visit next door. And tonight, you'll have the opportunity at a luncheon after the dinner. We will sit together to interact and reflect on the day. And the fourth element is obviously the exhibitions next door. And tomorrow, well go to Hesto Harnesses. Just as a note, even the pointer is green because everything in the Metair results in this half is green. So then in the afternoon, we'll go to Lumotech. And then Friday, dedicated in understanding FNB in the South African aftermarket and battery opportunity market. And what we wanted to give you, even if you just participate in today, that you can touch every company by going to the exhibition area.

So it's a very involved agenda. I've done the welcoming. And just on that, I also need to say thank you. A good result doesn't come without a team effort. In Metair, we believe business to be a team sport. It's really a team sport. And if you look at corporate failures, sometimes it's centered about very charismatic individuals that have a certain influence on a business, but the whole real protection that you have in the business, we like the charismatic individual input from technical experts or people that focus on manufacturing excellence, who've got a good market understanding or Adrian that understands technology. But the final execution, implementation, the sustainability and the business lies in a team effort, and it's really a team effort. So please see today us building the team effort and explaining to us. I would rather speak the whole day. We would have liked to have all 10,000 employees here and speak to you to every employee that we have in our business and their contribution because every one of them are important. But unfortunately, we can't do it. So we're going to talk a little bit about how Metair work and our strategic review because it explains how our business is designed. And then Sjoerd's got the nice presentation with everything green except one little slide, working capital, but it's by design and not by default -- by fault, a little bit of increase in working capital. And then I'm going to finish off with the more difficult prospects statement.

Our agenda today is designed on these 4 key takeaways. We want you to understand that it's a very good result. In a difficult and challenging market, the value and volume opportunity that we've had and made it possible us to produce a very good result. We want you to walk away and see that we have quality business, and a quality business is about quality people and quality products. So the physical facilities that you're going to see, and again, Selvin, to you and the team, thank you for putting this together. We choose to start the year with you. They are an exemplary of our manufacturing excellence in the group and we all aspire to be. So thank you very much for what you guys have put on here. It's really a team effort, but it's also an honor for them because they can get your reflection on the business and then also to touch the quality product.

Everything by Metair is by design. We like to make money by chance, but everything that we do is by design. We're an engineering, manufacturing business. So the principle is by design, and we base our philosophy on the Japanese, Toyota, continuous improvement method.

And then for the last takeaways, we want to see, even in a difficult market, that we're structurally very well positioned. The manufacturing industry with the technology shifts, with where vehicle manufacturing is going plus the capital investments that our customers are making, there's huge capital investments.

Just to give you an example, a new vehicle investment, if you decide to launch a new vehicle, it can cost you at 30,000 vehicles, a minimum of ZAR 1.5 billion, but if it's higher volume vehicles, ZAR 3 billion just in the tooling to produce a vehicle. The manufacturing facilities that you must relay up in body and wide-panel production, impressing production plus the paint plant, plus the assembly plant can be 3 or 4x that investment. So ZAR 4 billion tooling investment to launch a new vehicle can be a ZAR 16 billion investment for the manufacturing facilities. That's the cycle that we are in.

Metair, between now and 2022, will replace all of our business. The customers and the vehicles and the products that we produce today won't be the ones that we produce in 2023. We're going through the same placement cycle. South African industry, we're sort of a microcosm that we're very structurally well positioned and very good support with our government support program, APDP and the SAAM program and a focus on vehicle manufacturing. That's the key takeaways that we want you to achieve from today.

So what is the salient features of the result? It must always come back to the numbers. Grown 19% to ZAR 5.3 billion. First time that we're exceeding our hurdle rate. Our WACC, weighted average cost of capital, if you look through all of our businesses and the different geographical areas that we in we put ourselves a target of 13.1%, we achieved 13.7%. So we're very, very pleased with that, 19% improvement in EBITDA, 21% in HEPS. A little bit of the share buyback has helped with that, obviously. This is the only negative, is the free cash flow, but it was by design because our industry are going through a 3-year wage negotiation. We also had the labor negotiation in Turkey. If you're a big, dominant supplier in the industry, that's all about reliability. So we want to show our customers that even with the 3 of labor disruptions that we continue to supply them, not in infinity, but within fair and reasonable time that we think it will be a normalized time of a labor disruption in the environment.

If we look at the softer issues, we've got excellent progress on our strategy. First, lithium-ion technology investment. It seems that we're seeing a technology shift incoming in our business. It's an automotive production expansion opportunity, all the investments our customers are making. Local requirement, they will free -- from group combined, there were some of our companies are close to Level 1 and Level 2 contributors and then continued good results from overseas operations.

For Turkey, 2 consecutively 9x in half year results, beat the currency challenge is a big achievement. And again, we managed to do it. So we're very happy of that. It's coming in good increase, 85% in exports out of the Turkey environment, but Sjoerd will talk to you about it.

So what is the salient features of the result. Capital allocation. We've honed on improved capital allocation has given us the improved return on investment and it's come through the volume/value up opportunity. We've given more back to shareholders.

There's a little bit of confusion. On the short form, the new short-form result that we put out, everybody thinks we've declared an interim dividend. We haven't declared an interim dividend. We just made the same announcement. It's just a reflection of the dividend for 2018 was paid in 2019. So there's a timing differential.

So we've given ZAR 200 million back to shareholders, not new dividend, the one that was paid already to shareholders, and we bought another ZAR 45 million of shares back up to 3.7% of the shares that we bought back, and Sjoerd will also show you there. Big operational investment.

FNB, performance, back on track at the 10% PBIT level that we said we would target. We structurally think that's where the business is designed. So if you want to understand the opportunity of FNB, transparent display of them all. Go speak to the team.

It's limited to what it can do in 2.2 million batteries, but John (inaudible) who is also responsible for what you see here with his team. He's got an excellent manufacturing team, with Gerald (inaudible) that they put together here in putting a manufacturing standard in the group together. He's progressed into FNB with a big focus on the manufacturing excellence to make our capacity constraint go away without capital investment. Because at the moment, we've got the luxury of choice of customer at FNB. So continued focus on uplifting. And Dr. [Pili] has got the responsibility to design the commodity out of the product with the launch of new product designs. We want to save 10% or 15% of the cost of delay, but it's not necessarily going to translate in better PBIT levels. It's maybe to improve our position in the market, to grow market share and to be more competitive. Big focus on manufacturing excellence and then export market focused. And then we're very well positioned for the future.

Metair explained, and I'm still going to make it in my half an hour, even though it's a very condensed presentation. I think it's very important because we've got long-standing shareholders that's in the room today, new shareholders that are in the room, but also potential interested shareholders in Metair that you understand Metair. Metair, we believe that the governance is the system that we've designed. So coming back to Metair, we do everything by design that direct grow and control our business. It's a specific system, and it's built around a team approach.

But in the automotive industry, if you replace your models every 5 to 7 years. So that cycle has shortened. 10 years ago, 5 years ago, if I stood here I would have said models can last 10 years. Today, some of them got a life cycle of 5 years. So the frequency of model replacements in technology shifts are more high. Unfortunately, our customers have to double invest because they've got to be in both technologies. They've got to be in internal combustion technology and electric vehicle technology in the same platform. That means double the tooling costs in the investment. So that will explain you where the cash is going in a Mercedes-Benz or in a (inaudible) and the customer basis that we have. But it's on the principle that its continuous improvement and adjusting to the market. But it requires balanced focus on performance, conformance and keeping all stakeholders in mind. That's why the focus of the theme that we brought results to the market this year was on a balanced sustainable. So return on invested capital is important, but it must be balanced and sustainable. That's a carve out that Metair is designed into our business.

So we pretty much believe in the collective system. We like the individual contributions, but the final implementation, the final sustainability and the final execution lies on the team approach. You can be as good as an individuals as you like. If you don't have good team to make it institutionalized in the business, it doesn't happen. I'm not going to explain everything on this slide. Please read it. You must understand the way Metair is designed. But don't forget here from the input where it starts.

Shareholder expectations. We do realize that we work for shareholders. Talking about working for shareholders, I forgot to say in the beginning that the board members that are here, the 4 of you, from Sjoerd and me, we would like to thank you for giving us new 7 years’ service contracts. The Board has just awarded us in the last 2 weeks or 3 weeks, 3 new service contracts. So we're honored to be in a position to service the company if we can last 7 years, for the next 7 years. Probably Sjoerd will do until infinity. I've also reached sort of infinity [age] probably going to run out of legs. But also on that, I don't forget this one, retired board member where, where is Ralph. Ralph, step down. Please speak to Ralph. A big part of Metair's success comes from our Board interaction. Ralph has been a 20-year serving member on the Metair Board, was the Manufacturing Director of Toyota, and I still think there's a few boot marks, you can look at most of us, let's say, it's Ralph either on the neck or somewhere on the arm, in pressing us in the right direction. But we live in the collective approach, and the protection in business life lies in the team and the team effort. And the ethics that come with the team effort. You must be allowed to challenge. So the culture of being able to challenge and question is very important. Silence is not an option in the Metair. But it's very important to understand what is our stakeholder requirements, and that's why we've got such a big Metair team here today. We want them, we, an investment holding company. They clearly understand what Sjoerd and myself require of them. But we transfer your requirements as shareholders through them. Sometimes, once every 3 or 4 years, it's very good for them to have the direct exposure to you that while you see, we've got a rotation system, who you sit with, who you're with in the delegation, who you're doing the tours with through the factory, it's to give everybody an opportunity to have some sort of level of shareholder interaction because that's very important for us. We want to know what's the shareholders' expectation.

Very important part of design at Metair, we believe that we've got a design differential. And what's it about. It's all about relevance. Sustainability comes from it. You must constantly make sure that you are relevant. If you lose your relevance, you lose your business. So we say, we've got a design differential, all of our products next door are subject to customer choice. We only have 8-hour signal of what we need to produce. That's a very good moat. So this is the Warren Buffet, "What's the moat around the business?" So those of you that come to the Metair for the first time, this is the moat around our business. All of our products are subject to customer choice. So it's very difficult to predict, and they all have high logistical and packaging cost. So they have to be made local. Dr. (inaudible) when he designed this business was very clever and saying what's the moats around the business. They've got limited shelf life. If you look at the lithium-ion battery, everything that Adrian has got on display is fast because we can't bring it. It's impossible. If you go to the prime stand, there's a cutaway there from a lithium-ion powered cell, it looks like pieces of paper. That's what a lithium-ion cell is, it's aluminum and copper foil, covered with either carbon or an active material. But it's printed on it. It's printed technology. But you can page through it, it looks like reading of a book. Go touch the product. See it. But to bring it, it has to be fast. To transport that product, the permits, the risk of fire that comes with it. That makes it that it needs to be made, sorry, locally. And then we do it from local commodities. We've even got (inaudible) so far to produce aluminum foil that could be approved for all lithium-ion battery cells in the world. So South Africa has got aluminum foil of 20 microns that we can put the material on to be able to make aluminum foil covered product for lithium ion. What does it give us? It gives us relevance. It gives us market relevance, product relevance, technology relevance, but a big portion of Metair is partnership relevance.

The manufacturing base in South Africa is not big enough for you to be a technology specialist in every area that we produce. So we are technology specialists in certain areas, and that's the energy field with the technology partners. So Metair explained, if you look at our businesses, you'll see the 100% businesses, we own the technology. The 25% businesses, we're sharing technology with them. Either technology are coming to us or we passing technology to them. So it's understand that the business design in Metair is around the IP and where the technology is. Prime, the technology is ours. It might lie at the moment with an individual, but our opportunity is to institutionalize that into the business, into [Arambe] by the interaction that we have with Adrian. So the percentages, even though the way we -- so it's an important part of our business. In the South African environment, if you then want to service a small vehicle manufacturing environment, ZAR 500,000 out of ZAR 100 million. Really, it's less than what, point-something percent of the total market. It's very, very small. You must have technology partners.

So in the big business, now Smiths Manufacturing, if you look at the tech, we don't own it 100%. Why? Because we don't have the IP. We get it from our partner. When we get it from a partner, we want them to be a partner in our business. So these are designed, even in the shareholding behind our business.

Where we service a small industry, Lumotech, we have some IP that we've developed over time ourselves to be able to do it. But because it's a multi-license agreement, because you cannot service a vehicle manufacturing industry in South Africa that has American, German and Japanese car manufacturers without having a multi-license agreement. So a multi-license agreement means you've got to do it from a 100% shareholding company. So we're the 100% shareholder. So every business has got a specific design to it. Depending on the product that it makes, we would need IP partnerships with and who does the development. But the split is automotive components and (inaudible).

So just on the strategic review, why is Metair doing a strategic review? We don't believe our share price is trading at value. It's not at the intrinsic value that us as management or us as a board see it to be at. So then we must look at our strategy. And what's the Metair strategy has always been? Now our strategy is easy executable if everybody is on the same page. And there's normally, shareholders, customers, market and technology. If all of them are on the full page, it's very easy. The problem is our industry has got shifts. We've got market shifts. If we look at trade wars, and we have vehicles that are going through this. We've got customer shifts and working together in developing new platforms, new vehicles. We've got technology shifts that's coming. And that's why today, we've got the technology presentation with you. So therefore, we must look at our relevance. So what's the strategic review for us about? It's all about this. I'm not going to go through this slide, but it is important. It's about defining and understanding our relevance. How do we maintain relevance in a changing environment. So why is this slide important? Typical in the automotive industry, all our products that come next door comes with a warranty. But we get field failures and we get warranty claims. When that client gets back, we ask one question 5 times. And that's the why. And we do believe in the automotive industry there's a principle of root cause analysis. If you ask why 5 times, you come to the root cause of the problem. And we need to physically replicate that cause of that problem. We need to emulate the environment to be able to understand if that's the real reason why it's caused. That's why we've decided to use Dr. Roger Martin's principle of asking 5 questions about strategy. And that is very simple. What's our winning aspirations? Where do we play? How will we win? What's the capacities that we need? And how do we manage that process? So very complicated process, really made simply, but is designed for us. And it's very easy then. We put on the Y and X axis what is our internal strengths and what is the trends in the market. Is it slow changing or fast changing? And then we see what's the quadrantic response that we need to get it. So what is it? Strategy is what's your strategic response, depending on your internal strength and the trends on your business that you need to direct your future. And that's what we did. And where does Metair land? In our energy vertical. It lands in that we need to redefine the playground. Why? Because the market is rapidly changing. For us, it's the crest of opportunity, leverage our strength into the future. That's the change from lead acid to lithium-ion. How do we manage that change and how do we manage that opportunity.

And on the automotive components, the change is not so fast. On the component level, it's slower. So there, we're very comfortable where we are, we want to continue doing the same, but we find the small opportunities. Those opportunities are displayed next door. If you go to the Hesto stand, it started with wiring harnesses. Today, it's instrument clusters. So previously, we did -- just a communication between the man-machine interface. The instrument clusters, your man-machine interface, we did the communication behind that with the wires. Today, we also do the display of that communication with the instrument cluster. That's the opportunity. But even within the instrument cluster, there's other opportunities. We do all the polypropylenes in the plastics, but there's electronics in there, there's a PCB board. That's probably the next level of extension that we'll do is going into the PCB boards. So it's doing the same, but localizing it and focus on the current business because it's not so subject to the shifts. But what does it mean? And I think this is a very important slide that we have analyzed. Our businesses look, where they moving to. So in automotive components, we got to move towards redefining our operational model and finding new business opportunities, but pretty much staying the same. In the energy vertical, we move towards the playground. And the playground mostly speaks to us technology. And then we ask the questions, and that's the portion that we're going to do in the next 6 months. That's the portion that we're going to come and see you with. For instance, what type of shareholders do we need to be able to execute this? Because maybe the shareholder base that support this is not the shareholder base that support that. So it's very important questions that we're going through. And why? Because we want to extract maximum value because we don't believe we're trading at value for our shareholders and the stakeholders in the business. Our sustainability is also that we provide our businesses with the right base to be able for them to respond to the shifts and the technology changes. So if we need to make an investment, we need to have shareholders that support our investments.

So please, you're going to have a couple of days to assimilate all of this. Please read it in detail. We couldn't go through every one. And so hopefully, by the end of the 3 days, that you got a full understanding of not only our results, but how our business is operating, what's the technology shift that we're facing and how do we see meeting those challenges into the future, but also understanding your requirement. You can enter Sjoerd. I did take 5 minutes.

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Sjoerd Douwenga, Metair Investments Limited - CFO, Financial Director & Executive Director [3]

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I had to put some pressure on you there, to get you off the stage. So thank you, everybody. I'm going to start with the group results at a glance. As you can see, it's all green indicators are on the right direction. It's a very pleasing result. And with that, I'll hand back to Theo. Theo, on a more serious note, we do say it's a good result. But why do we say it's a good result? And the reason is mainly for 2 reasons. Firstly, Theo has mentioned that we're operating in 2 big economies, South Africa, for us, South Africa and Turkey, which are under pressure, but we've been performing well despite that. And then more specifically, is the top line growth. So when we look at the top line growth, and I'll talk about the underlying operating drivers of the top line growth. And that's really key for us in why does this feels like a really, really good result.

In energy storage, revenue up 14%, underpinned by 15% overall volume growth. That in perspective in the markets we operate we feel is very good. Automotive components is not so confusing. But overall, we had a 5% customer volume, so our significant customer volumes are up 5%. The market grew by 10%. But our revenue is up 24%. So that talks to 3 particular items. The first one is South African OEM production is growing. Secondly, what Theo mentioned before, the value of our products that we supply into our customer base is growing. That's like Hesto Harnesses and the Lighting example.

But thirdly, is we're also expanding our customer base. So if you look at Metair 8 or maybe 5 or 8 years ago, we had a single customer dependency, which was 85% or 90% of the business. And it was Toyota in the automotive components vertical. For the 6 months, this result here it was down to 60%. And not that we get trading out of Toyota, we're really expanding in the customer base. We're growing volume and value and customer base, and that's why you see on the spot of a 5% volume growth in our customer base we have managed to achieve 24%.

So as I go into the detail, we see that the top line growth also resulted in good EBITDA performance, order components, up 15%, energy storage increased by 17%. I've already had a lot of questions from everybody on the free cash flow and the working capital. We'll get through that in a bit of detail. But essentially, if we're growing revenue by ZAR 1 billion in the first 6 months, it doesn't come without working capital. There's got to be a working capital investment behind that. And then there was some specific working capital investment in Turkey, which I'll touch on.

Operating profit up 21%, margin, up 0.1%. Energy storage margins expanded quite nicely. The automotive components declined a little bit, which I'll discuss later in the detail. But 18% increase in headline earnings and because of the share buyback that relates to a 21% increase in earnings, headline earnings per share. And then return on invested capital increased to 13%. Our hurdle rate has gone up to 13.1%. It used to be 12.4%, but with the increased borrowing rates, especially Turkey and the impact on South Africa, it has gone up to 13.1%, but very pleased with the increase in the returns that we've seen.

And looking at the consolidated income statement, just a couple of items. ForEx is a reality we live in emerging markets. So we always need to touch on that. The net ForEx loss, so that's taking into account creditors, datas as well as our foreign exchange contracts was a loss of ZAR 30 million in the first 6 months. Last year was a loss of ZAR 15 million. The majority of that's driven by Mutlu and the fact that we're buying the commodity in U.S. dollars in that market. Our effective tax rate has increased to 26.4%, which is up about 1% from last year. And we do benefit from tax incentives in Turkey when we do new technology capital investments. And the fact that it's gone up just means we haven't done any major further investment in the first 6 months, so we don't benefit from that.

Our net interest rate also increased by ZAR 21 million due to higher Turkish lira borrowing levels as well as rates. Last year, this time I think Turkey was still benefiting from fairly decent borrowing rates. Then came August and a Twitter spat between 2 of the world leaders which led to a big currency devaluation in Turkey. And then also a dramatic rise in interest rates. So we've always been better than market on interest rates, but obviously, it's been higher. And that's pushed us, and I'll talk to that a bit later.

We have seen a decline in net interest rate by about 4% to 5% in the last couple of weeks. So that was also good for the business. And then other operating income was down by ZAR 50 million. And it's a bit of an anomaly. We -- it's a classification of the way we account for foreign exchange contracts as well as foreign exchange gains and losses. So the biggest swing came from the derivative revaluation. But if you look at my first bullet, it's only really a ZAR 15 million swing if you take the full income statement into account.

We did mention the weighted average number of shares came down by about 7 million shares. The total buyback, that was about ZAR 150 million from midway through last year. So a total number of shares we bought back is 3.7 million, and we've shown the trend in our return on invested capital over the past reporting periods, which is also very good. And then you also see there's a big -- slight increase in the working capital, which I've touched on already.

Just some items on the balance sheet. We did approve the final commissioning for the lithium-ion line in Romania. So that was about 80 million capital investment. Lumotech, as Theo mentioned, is expanding currently. So the guys that will visit Lumotech tomorrow will see the factory expansion going on. We also had an impact of operating lease capitalization in line with IFRS 16. So we're lucky. We don't have that many operating leases.

But you might find this in other companies that have a much more dramatic increase. So that was capitalized to the PPE line. And then Mutlu reporting currency drop of 15% balance sheet to balance sheet, so that reduces the carrying value of assets in their books.

Net cash impacted by higher working capital, and I will discuss that on a separate slide shortly.

Gross borrowings was up ZAR 663 million. ZAR 100 million of that relates to very specific working capital that we've invested into Mutlu. Theo has touched on it, but it wasn't in strike preparation. We're going through a wage negotiation cycle. And to ensure that we keep our customers going, if we have a strike, we've had to invest that temporarily. That's also one of the differentiators -- why we gain an overweight proportion of their business, that we can support them during wage negotiation cycles. We've also expected from Mutlu ZAR 150 million in dividend to South Africa. So that's just to normal discipline, but also to show that there's no restriction on cash coming out of Turkey at the moment. Operating lease, we have discussed ZAR 80 million for the Rombat line. We've discussed in the [win], we will also use the final ZAR 45 million to complete the share buyback. At the moment, at the moment, at that moment, in June, Turkish lira borrowings was about TRY 200 million at an average rate of 22%. So it was a little bit high. The average rate has improved to about 20% at the moment.

Okay. So working capital, if you look at it in days, it's been actually quite well-managed. From June last year to June this year, it's only a 1-day difference in working capital. When you look at the values, it's obviously a little bit different. So a total ZAR 301 million in increase in working capital. Specific stock build in Turkey for the strike preparation, that should unwind by year-end, because we're through the labor process. And then higher inventory and debtors levels across the group just to support the inventory of the revenue expansion. And then obviously, our lead payables fluctuate from time to time depending on when you settle a big payable for [it]. But we do expect with -- regardless of the revenue increase and the working capital support, that our overweight position of ZAR 300 million, if you want to call it that, should unwind by year-end, that we've got enough plans in place to effect that.

So on our capital structure, our net debt has increased to 1.3% (sic) [1.3x], which is still well within our level of comfort. We do expect an improvement similarly on the net debt position as we unwind some of the working capital by year-end. And we still, as I mentioned, this is still well within our comfort and just a confirmation that we're well within any compliance or covenant requirements on the debt position.

So going to automotive components detail. A nice improvement in operating profit to ZAR 302 million, 16%. Return on invested capital, up to 34.3%. That is a really strong contribution. And if you look at our customer volumes, South African market grew by about 10%, our major customers only grew by about 5% as some of our OEMs like Ford -- and it was in the media -- experienced some manufacturing difficulty for a period of time in the first half. But that's also been resolved. And you see some pull forward in customer volumes in anticipation of potential strike action also as a result of the labor cycle we're going through. So we've seen good volumes the first 6 months of the year. It has come at fluctuating demand. So fluctuating demand does result in lower profitability down to the 10.1% because to cope with the additional demand of fluctuating money, it means we have to work overtime, it comes with premium cost. And that's just the nature of that.

Return on invested capital, a very nice trend. Still improving. You see even in the automotive component, the revenue growth and expansion of our product base has also required some working capital investment. And as I mentioned, the operating profit down to 1%.

And what does it mean for our guidance? We do take a cautious outlook on the labor situation in South Africa. And therefore, we still maintain our guidance for the 7% to 9% for full year '19.

On the energy storage vertical, very good results. Similarly, 16% improvement. Margin also increased by 0.1% (sic) [0.1 percentage point] to 9.5%. Return on invested capital up to 19.2%. Local operating profit was very good at Mutlu, up 57.4% in Turkish lira. Rombat was slightly down. I'll talk to that. And then FNB improved by 10%. Mutlu managed to beat the currency devaluation of 16% with that 57% improvement, so that's really, really pleasing. Again, Rombat profitability declined. They are our only pure hard currency focused battery business. So when the lead price goes up, you do benefit from increasing margins. When the lead price goes down over time, we do have a little margin squeeze, and we do make a little bit less recycling profits. So that's the main reason for the Rombat profitability decline.

But I think the good -- the really good result for the energy storage is the operating performance. If you look at Mutlu growing volumes by 380,000 units or 27% in the first 6 months, mainly because of export. Export has been a major strategic focus for us. We're becoming more competitive with our country, our country costs are expanding into new markets, expanding our customer base. But we're also broadening our supply into premium private labels, which is something we discussed at the full year result. And that's certainly showing good traction.

Local aftermarket has also been very resilient. So when we spoke to you at our full year result, we did say local economy was under pressure. The best we think is full year that we would be flat, at best half year, we are looking stronger than last year. So that does talk to the structural nature of the business and our product positioning as well as the company and distribution, network positioning within Turkey. So that's also very pleasing.

And the OEM volumes. Although OEM production in Turkey was down 10% to 15%, we've been able to maintain our volumes. And the reason we've maintained our volumes is because of increased market share. And that market share was driven by higher demand for AGM start-stop batteries. And we're the only OEM AGM start-stop battery producer in Turkey at the moment.

Volume -- Rombat also grew volumes by 6%, which offset the impact of the LME curve. And then I think what was really good as well is FNB growing volumes by 5%, mainly driven by the aftermarket, which is against the trend in South Africa. It is a difficult market, difficult economy, and to achieve a 5% growth, I think is really good -- that talks to the new product positioning, the rebranding, becoming more competitive. And as Theo said, we've still got some way to go in quarter 4 when we launch the newly designed product for the aftermarket, which will even improve our competitive position even further.

Just looking at the margins on automotive. Automotive margins expanded by 1.4%. Our local margin was up 1.7% (sic) [1.7 percentage points]. Export margins was up 0.7% (sic) [0.7 percentage points]. I think the only disappointment or I think the real economic impact is in the industrial demand and industrial margins have been under pressure as well as demand under pressure. So we saw some retraction in demand. There was also some delay in orders placed in Turkey for telecom batteries.

So as a result, Mutlu, grew ZAR earnings by ZAR 35 million. Rombat was largely flat, and you can see FNB increased by about 10% to ZAR 104 million PBIT, which is very good.

And then finally, I will leave you this beautiful slide as I hand over back to you, Theo.

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [4]

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It's very difficult to compete with that one, Sjoerd. Thank you very much. Just there's a lot of things that make it possible to bring a good result to the market. Obviously, a good growing market with a value opportunity we are extremely grateful for; good government support in vehicle manufacturing in South Africa; good customer investment for product expansion; good performance from the individual companies, Wolfgang at Lumotech, Mark at Supreme, Selvin here at Smiths Manufacturing, Achim at Mutlu. But we also like to analyze the results.

So I must thank Sjoerd here as well. You get an AFD and then you get a CFO. Big differences in understanding, predicting, analyzing the results. And what does it mean for the future. Sjoerd is very good at that. So Sjoerd, thank you very much for your contribution. But it also doesn't happen to bring this result to you without the Metair team. We are a small team, only 8 people in the office. (inaudible) just put up your hands from Sanet, Monica, Anesh, Robert, Astrid -- you know, this Investor Day also doesn't happen if somebody doesn't organize it. So Astrid thank you for all the work that you've put in together with our partners here. We've got Instinctif and we've got One Capital and other partners in our business. It all helps us just to carry the load because 8 people in the head office. We target ZAR 1.5 billion turnover per person. If more companies would do that, the head office of South Africa corporate would be doing very, very well.

I'm going to come to the part that's probably the most difficult to talk to you about, it's framing the next 6 months. So what we're saying is, structurally, the business is very well positioned. Automotive customers are launching new products. There's always a vehicle launch risk in our business. And you've seen that with the Mercedes volumes. The Mercedes' volumes are down because of the vehicle market position. So when we launch a new vehicle, the vehicle needs to be successful. We've got one very good success story in there -- that's Ford with the Ranger, their position in the world market, what they can offer Ford in the U.S., how much are they going to get allocated to produce in the future. All positive. The negative one is a vehicle doesn't launch well, or the demand is not at the level that it's got, or you get model confusion. The vehicles that they import compete with the own model that they produce locally. So vehicle launch success is a big success factor in our business. But we have the opportunity. So we're in a big investment cycle of vehicle replacement.

But what do we say about the next 6 months? There's probably -- in the 13 years that I've been at Metair, or going for 14, and hopefully for 21 if I can survive every performance appraisal after every week on the 7-year contract, is how do we frame the interim noise that we have in the market? Because we are in a wage negotiation process. So it's probably, in the 14 years, the most difficult that I find myself to talk about the outlook for the next 6 months. So we would now like to ask you, read our interim results statement and go through the commentary and really understand and question us in that.

So we've broken it down just in 3 aspects. The general one, we are in a very delicate phase in the labor environment. That's why the industry is pushing for a 3-year wage agreement -- because we like stability around periods of vehicle launches. Because part of vehicle launch success is you being able to fill the system with demo models in all the markets that you allocate it and launching them at the same time compared to the other markets that you are in. So labor stability in a period of new automobile launches is very important. And we have told you and you should understand, that 2021 period to 2022, we're replacing all of our vehicles in this market. We are launching new models and major shifts in volume potential up, and therefore, a 3-year wage agreement is very important for us. So it gets us through that critical 2021 period with stability.

So I cannot say too much about it. We're all under a gagging order that's involved in the industry. We've only got 1 spokesman that speaks to the industry, both from an OEM perspective and from an automotive component perspective. But we've just come out of a wage negotiation yesterday. One of the phases of ours. So we are very sensitive.

But it's critical to provide a stable and sustained manufacturing base. Big investments, if you talk to anybody doing a ZAR 4 billion to ZAR 16 billion investment in a new model platform together with the tooling, he wants to know that, that base is going to be stable. That you can deliver on your promises that you put into the mother company in either America, or Japan or into Europe somewhere.

So, therefore, it's probably the most difficult time that I've ever had to formulate the outlook for the second half. But we need to clarify, we operate best on a stable and high volume. So you've seen the high-volume environment from a turnover perspective in the automotive components, what it has done for turnover growth. But you've seen the margin decline because we had to respond to the market and [customizable] to counter -- to put possible disruptions that's coming from the strike.

I would like to highlight this one -- that we are sensitive for commodity price movements and currency fluctuations. So what we've seen in the currency lately. We are normally sort of in a lag in recovery, the currency. So long-term currency is good for us because it wasn't so long ago, maybe 7 or 8 years ago, when we were talking about ZAR 7 or ZAR 8 to the dollar. And we said that's the level that we think we are competitive from our vehicle manufacturing and our component manufacturing. At ZAR 16, I don't say we're double competitive, but we're much more competitive in a weak currency environment in localization if we got the right commodity and the commodities got those moats around it, subject to customer choice and doesn't travel well. Localization becomes very important.

But the first commodity signal that you've seen, the most sensitive business that we have in commodity cycle signals and margin is actually the one that's in the most difficult market. There's Rombat from Romania. Because they're a hard currency traded business. But also they're a bigger proportion of export markets. So export market is a per opportunity export. So you quote immediately on the LME. But you can never match your purchases of your commodity like lead rightly with the LME, because the pipeline is 6 months. And I'm basically going to sell you lead for 6 months pipeline on today's price, that's sold and the price that was relevant at the time when you placed the order. So we've always got that commodity cycle that we need to manage. So Rombat's result is already indicating to you that in a commodity down cycle in pricing -- so we like commodity prices to be high. But on a late commodity down cycle, he's the first one that fronts in the sensitivity on margin, and therefore, the decline. We are also most sensitive for that with the OEM customer because some of our OEM customers, we will adjust prices monthly. Because one of the risks that we don't like taking in our business. We do know we take model launch as a risk, we take volume risk, we take quality risk, but we do not like to take the commodity price and the exchange rate risk. So that's something that will need to be managed, because we don't like this. We would like a little bit more stable.

On the energy vertical, geopolitical position in Turkey has improved slightly. Macroeconomic indicators, we've said in the results commentary, there's improved -- interest rates are down, inflation rates are coming below the 20% level. So the macro indicators are bigger. Unfortunately, there's been a devaluation. We would like to see a more stabilized exchange rate environment. We're very grateful that we have been consistently 9 half year period reports come here and tell you that we beat the currency devaluation, but we would like it once to go the other way. So it's something that we look forward to, to be able to do it.

Historically, our second halves are our high-volume areas because we go into the winter demand periods. That cycle should continue, we haven't seen that dramatic changes in the climatic conditions -- that winter disappeared out of Europe. So we hope for a very strong winter.

And we need to continue to build the growth in the export markets. So we've always had 3 pillars that we stood on, on the Turkey environment. If you look in the industrial logic, that was the strong aftermarket. We managed to maintain ourselves in the aftermarket. But the reality of Turkey today is Turkey are going to sell 100,000 vehicles in the second 6 months. When we bought Mutlu, we sold 1.1 million vehicle per annum. We've only sold 200,000 vehicles in the first 2 months -- the first 6 months. That came with a lot of government incentives, less VAT tax, less carbon tax, a lot of incentives in selling vehicles. Those incentives all discontinued in the second half.

Our prediction is we will only sell 100,000 vehicles. So out of a 20 million vehicle park market, the replacement is very, very low. That doesn't affect us today; it affects us 5 or 6 years into the future, because a battery comes to us every 5 or 6 years. The challenge that we then have is we need to position our business for 5 or 6 years in the future. And hence, the focus on the export because the -- we can see in the currency where does it give us strength, in local manufacturing, cost competitiveness. And therefore, we're also going to private branded products. So when you speak to Achim, ask him what's his plan. His plan is to go into private branded export product, like the Bosch product, into North Africa. For us, somebody that's got a branded product but doesn't produce, but we can become the manufacturer. So we take that manufacturing away from something else, and we become the supplier. So the strategic understanding of what does the business signals means to us now and how we respond to them 5 or 6 years into the future is very important. But, therefore, it's very difficult for us to frame the second half for you.

Automotive components vertical. We are very happy that the negative noise that's coming out of vehicle sales in South Africa as Metair is driven by what's manufactured and where those manufactured goes into the export markets, not what's necessarily just sold in the local market.

If you look at Brexit, 30%. So a very important report to read is Dr. Norman Lamprecht report out of Naamsa on the automotive export industry. He puts an annual manual together that you can read per component: Tires, rubber, batteries, cars, where they're going, who's buying them. We are winner of Brexit. 30% of what we're exporting today is going to the U.K. A hard Brexit, the harder it is, the more South Africa is going to sell vehicles into that market because we have our trade agreement with them. So that opportunity is great. The winner of the trade wars between Trump and China sees that Ford takes a certain position of vehicle manufacturing within South Africa. That's positive for us. So if our politicians can cut out some of the noise about South Africa, we can remain a winner in this environment. And that's why we say the structural support and the commitment in the industry to grow manufacturing in our business, in the automotive industry is fantastic at the moment.

So in the short term, production dependency and stability is dependent on the successful conclusion of the wage agreement. We want to see a responsible conclusion of the wage agreement around the levels, the benefits and the timing of it -- if we can have a responsible settlement done there. So what is norm? Metair firmly believes that labor has got the right to withdraw itself, to withdraw its labor. It's an intrinsic right. We respect that right. We also believe that sometimes labor strike really because of the political environment that we are in or delivery environment that we are in. So there's normalized disruption and abnormal disruption. We would see a 2-week, a 5-day to a 2-week period of disruption at our customers in the same period, 5 days -- so 2-week disruption at our own facilities as normalized. Anything longer than that will be abnormal. The worst that I've had in the industry in a particular year -- when me and Mr. [Jim] couldn't see eye-to-eye so much, were 6 weeks. So we don't necessarily see a 6-week disruption period. But a 2-week disruption period is something that the industry, as a contingency plan, will plan for. But one should say is then you must understand the guidance that we give in the margin. If there is a disruption, we normally don't lose the market, but we need to maintain that market. To maintain that market, we need to do that with extra resources. And extra time and working weekends and catching back. So we still believe that, because of the potential disruption in the second half, that is very difficult for us to frame. We see that as short term noise. The short-term noise, yes, we could be in the short term effect. But structurally, the volume opportunity is there for us. But we will focus within this afternoon as you to understand the value opportunity.

In the technology presentation, that's all driven around what does the shift in the technology mean for us in our individual businesses. And hopefully, your takeaway from that would be, as you can conclude where we land, is that is all positive for us. The commodities that's affected with the technology shifts that we're going to experience has got a positive effect on the value opportunity within our product base that we supply.

So thank you for your support. Thank you for listening to us. We listen to you now as we go to questions. We normally go to the webcast first, and to see if there's any questions from the system, and then we give the microphone to the floor to take any questions. Please, the difficult financial ones like tax rates and all this, can you just pass them to Sjoerd?

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Questions and Answers

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Unidentified Participant, [1]

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There are no questions from the webcast. Can we check if there are questions on the line?

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Operator [2]

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No questions on the call at the moment.

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Unidentified Participant, [3]

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Thank you. You can go to the floor, Theo.

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [4]

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Good result there, obviously. Okay. Questions from the floor. Christina?

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Christina Steyn;Absa;Investment Analyst, [5]

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Thank you for the presentation. Can you just talk to the revenue contribution from the buildup in inventory? Because you spoke about that for the automotive components, and that will maybe not repeat in the second half. But just to give us a size of that contribution, please.

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Sjoerd Douwenga, Metair Investments Limited - CFO, Financial Director & Executive Director [6]

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Were you referring to the pull forward?

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Christina Steyn;Absa;Investment Analyst, [7]

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Yes.

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Sjoerd Douwenga, Metair Investments Limited - CFO, Financial Director & Executive Director [8]

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So in unit terms, it was about 10% on the Toyota volumes, and Toyota 60% is of our revenue, so it's probably about 6% of total, 6% to 8% of total revenue.

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [9]

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Just to put it in perspective, we are fortunate that our customer base are planning a volume up for the second half. That's why the wage negotiation is [taken out of the way.] So if you look at the industry that's known in the market that 1 customer has launched a new vehicle, have put on a third shift, that's Ford. Has put on a third shift in their manufacturing facilities, and that's the increase in their daily build rate. And they are planning that for the second half. But it depends on where and how it kicks off. The earlier it happens in the second half, the better it is for us and the quicker it comes to stability. And if it's void from any catch back, because you normally don't to want to launch a volume up both in new markets that you penetrate together with already catching up with the vehicles that you've not delivered to the old markets. So that's why the wage negotiation -- so we see an overall volume up in the second half, especially coming from the third shift that Ford has installed. So you don't necessarily see a volume retraction in the second half, you could actually see volume growth in the second half, but it depends on when and how it kicks in, and that's all dependent on the wage negotiation.

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Christina Steyn;Absa;Investment Analyst, [10]

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And then can you talk to -- sorry, if someone else needs to ask a question, please stop me. If you could just talk to the AGM market share gains in Turkey, was that market share from existing lead acid product? And do you see it as a structural shift in the market? And why? And if you can maybe give us a sense of where you think it will sit also.

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [11]

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It's the new emission legislation in Europe. It also becomes a trade barrier by going to Euro level 6 emission levels. Most of the vehicle manufacturers don't achieve that if they don't have start-stop product offering in their product range. And the best solution at the moment for start-stops are -- they are lessons learned out of the EV technology supply out of more or less the conversion to AGM.

So we do 2 things. We convert into a normal commodity trade that carries almost no margin to a better margin product, and the percentage of the vehicle exports. So what happens, Turkey has had a 15% retraction in vehicle manufacture, but the market is down 90%. So it's become a total export vehicle manufacturing market. And because of that export focus that needs to go to markets with this legislation of Euro level 6 that comes with start-stop requirement.

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Christina Steyn;Absa;Investment Analyst, [12]

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Sorry, but that was on the aftermarket. So you mentioned the aftermarket...

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [13]

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Now in exports, we also have OEM exports. So Turkey has 2 elements of exports to it. It's got the vehicle exports, plus our customer exports like we're gaining traction of Toyota in Europe and supplying them there European export OEM production and aftermarket.

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Christina Steyn;Absa;Investment Analyst, [14]

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So that 300,000 increase, what did that relate to? How much was private label versus...

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [15]

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We will have to analyze it for you. Out of the top of my mind, I haven't got it for you. Between now and your lunch on Monday, I will have an answer. I understand what you're looking for. Okay. Any other questions? Thank you.

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Unidentified Analyst, [16]

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[Marreti] from ABSA. Can you just touch on these 3 risks and just the mitigants or plans that you'd have in place for the top 2 from the -- so the first being the vehicle launch risk or model confusion. So you had just briefly touched on that. The second being the abnormal disruption. So with the normal disruptions, those are usually short term. So it sounds like there's a place in play -- a plan in place, but then the abnormal disruption, as to the mitigants you'd look at there. And then the last being the European weather conditions. So the winter. So considering global, what is it called, global warming and all of that. The mitigants that you'd look at there.

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [17]

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Okay, it will be really great if we can mitigate all of them. But the way the cycle is also linked to the vehicle parks and the export opportunities. So one of the big mitigants for us if the European demand is lower because of the weather patterns, that we focus more on the export opportunities. So we do have, and that's why we've already last year started focusing the shift that we don't want to stand necessarily so strongly on the 3 legs in the Turkey market, but have more opportunity in the export market. So your big mitigant there is the range of products that you offer in the possible widest range of markets. And therefore, you go to private labels.

So it's the first time that Metair, and even when you speak to FNB, we've always only branded and sold our own product label. So Mutlu sells a Mutlu brand or a power brand. It's the first time that we're going to private labels, because the more customers we want to reach, we also have got to increase our market offering. So that's the big mitigant in the way the market is that you've got to be in more markets with more labels, and therefore, you have got to choose the right customer. And there's opportunity in that market because of industry consolidation at the moment. In the JCI environment, they have sold the lead acid battery business privately -- it belongs to a private equity today. Those opportunities and shareholder changes give everybody a lockout opportunity in supply contracts. And when that happens, it gives us opportunity to quote on the supply. So it's a private label focus.

As far as the labor mitigation goes, we can only mitigate 2 to 3 weeks. It's impossible for the industry because we understand the quality builder, the specific materials handling and packaging that goes with the supply of a product. We do not put stuff in plastic bags in carton boxes. it's not the design of a quality of a vehicle. So the big mitigation factors, what's the logistical support that you need to do and invest into in the packaging and handling materials to be able to supply the customer. What we normally share, so for instance, if we build an extra 10 days stock, we will sell 50% of that stock to customer, that customer will keep the stock. So he carries 5 days extra stock, we carry 5 days extra stock. You cannot mitigate more than that. So when it's a real industry disruption, we take the pain. If it's longer than 2 weeks, the industry will take the pain. Sometimes that can be mitigated by catching back. So the earlier disruption happens in the year, it gives you more weekend work opportunities to catch back. But that's a time limitation of execution until the end of the year. So if the disruption comes in January, it's easier to catch back by December. But if the disruption comes in November, you've got no chance of catching back in December because we have still December shutdown period. So it's very difficult to mitigate an abnormal disruption.

Vehicle launch risks, we also choose the products that we are in, okay? So we're probably around, I believe, some of the best market intelligence in understanding. So is Nigel here? Where is Nigel [Oxenham]? Nigel and the team here at Smiths is responsible for market intelligence in regards to customer forecast, success and release, right? So what's the confidence level in the vehicle. And the secret is to go into a vehicle that you've got very, very high confidence level. So it's a product choice that you make. We show aggressive pricing in business that you want to secure, to at least with the customer you're in a product that's very successful. South Africa, we've seen a significant shift from passenger vehicle manufacturing to light commercial vehicle manufacturing, and we probably, today, heavyweight and light commercial vehicle manufacturing, because that's the Africa market that's needed.

The other benefit that we have, all of the vehicle manufacturers are seeing Africa as the next market. So just the way that they are approaching Africa is by saying, we need to look after this market better, and we need to focus on the supply. So it's also the market -- so it's which vehicle the market is launching, what's the quality of the vehicle that's launching, what's the derivative, and is it a light commercial or passenger platform. And then also from a world consolidation point of view. These, for instance, if you take one particular customer, the vehicle launch risk, but what is also realizing in other manufacturing facilities that must go to electric models, so they are deciding, which vehicles will be the EV vehicle manufacturing? If, for instance, they decide that's the European manufacturing environment, whether they take, because you're never going to take internal combustion engine demand away immediately, even in the most developed market -- it is not going to disappear overnight. They're transferring that manufacturing of the internal combustion engine manufacturing derivatives to South Africa. So some of our customers are saying, we've got 3 plants that's producing internal combustion engines now, it's going to reduce to 2, but we're bringing that 2 -- the portion that we're taking out of Europe, we're actually bringing it to South Africa because of our trade position with Europe.

So I think it is enough. We can't mitigate all of it. But we've got to apply a little bit of intelligence in the choice in mitigating those 3. And then there's really no mitigation for a bad model launch and a bad model that falls apart. But that's the customer risk. And luckily, we haven't had those here.

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Unidentified Analyst, [18]

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Just a question on the investment. You mentioned all your business will be renewed come 2021, 2022. You guys have an indication of the size of a typical tooling investment -- could you give us some indication what your expected investment come 2021, which presumably will be focused through earlier?

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [19]

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Very good question. Very good question. Normal. We are very fortunate, and that's why we're doing the technology presentation for you, that where we need to make the shifts in South Africa, it's not technology shifts. So if you look at that point on where the outcome of the automotive components is, it's on the lower portion of the quadrant in technology shifts in the main business. That means we do it with current technology. Because for big investment for us is normally with technology.

So how our investment works? Customer-specific investment, we want them to pay. They own the tooling. We don't own the vehicle, okay? Because our philosophy is we can't follow our export market. We're happy to invest in the tooling if it was our aftermarket. But it's not our aftermarket. South Africa, because of our license agreements, we can only produce for [South] Africa, we can't follow our aftermarket. Because most of our vehicles are exported. So our investment capital model in the automotive components businesses is customer pays for the capital. So it's his capital. Therefore, he owns the aftermarket. But his aftermarkets is overseas, because we can't follow that aftermarket. So it doesn't come with big capital. That's very nice for us. So it's a replacement cycle, where volume and value up, and the customer paying for the tooling. It's a very good scenario. So we don't see big investments.

Technology shifts in the energy vertical, that's completely different. If we were to switch from lead acid to lithium-ion, that's a completely different discussion. When that will happen? In 5 years? 7 years? Or 10 years? That's also a different discussion. But in the next 2, 3 years, we saw normal maintenance, except a little bit for Wolfgang where he needs to expand the facilities. If the volume growth and the value growth needs that you have got to increase your footprint, yes, then we're obviously increasing the footprint. Footprint investment we make. We can't expect the customer to pay for the building, but we can expect him to pay for the tooling. So it's normalized.

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Hazel Khumalo;Absa;Analyst, [20]

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My name is Hazel Khumalo from ABSA Bank. Well done on a very solid set of results. I have 2 questions. FNB's performance seems to be pretty stellar and solid. What are you doing differently in this particular business to achieve this set of results? And my second question is what is your strategy regarding the rest of Africa?

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [21]

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Okay. So this is going to sound a little bit harsh. We've changed the people at FNB. As an investment holding company, you properly do -- 3 things that you must do very well. You must give strategic direction, you must do clever capital application and then you must manage the performance from the people. Every set of results are people delivering in this company. So a big change that we've had in FNB is we have removed 4 of our Directors out of that business, because a big focus is --- Jean Esterhuizen today is our manufacturing director. He's our resident expert in manufacturing expertise with years and years of relationship with Toyota, DENSO in Japan and manufacturing experience here at Smiths Manufacturing. If it becomes a manufacturing and efficiency challenge, you must go to the best guy that you have. He is the best guy that we have. He needs to institutionalize that expertise within the business, and that's what they're busy with. We've got Murray. We've taken Murray, he comes from the opposition, don't tell him (inaudible) Okay. So you need to understand your competitive space that you're in, but you also work for a customer. He comes from the Motors Midas -- how many names is it now? They're under -- have some strange name. Okay, so also understanding that. We've got Ryan looking at our franchise and our branding and our brand managing. We've changed the Financial Director. Teams deliver performance. And if we don't manage performance -- so a big portion of Metair is performance management.

What we've also done differently is our branding position. You can speak to Ryan. We have launched a complete new brand in the franchise because we've got a retail franchise side of the business. We focused on the pricing with our OEM customer. Because if you don't have a technology change in the battery, you become a commodity. So we like technology shift changes because it gives you value upliftment. But sometimes, a battery, if it doesn't shift from a normal lead acid to EFB and then to AGM, and you'll understand all of the terminologies after the technology presentations this afternoon. So it's also the technology shift, selling up from a normal lead acid battery to EFB or to an AGM battery.

Africa. I would like to maybe just go back to the slide. We follow our customer into the African market. Okay. So African market, in Smiths Manufacturing, we used to have part of our business in the aftermarket. We have separated that business out of the aftermarket into a separate business. We've given DENSO 51% control of the aftermarket business, we're the 49% partner, but that means then that they can grow into Africa with the full aftermarket product in their relationship with the whole of the Africa aftermarket.

We follow our customers into the OEM market. Because we pretty much still see the African expansion opportunity in vehicle manufacturing, either in East Africa, North Africa or West Africa. And therefore, we also -- that's why we, in Kenya, so our Africa strategy is we went there for the battery business because we need to understand the technology requirements. We need to transfer our technology into maintenance-free batteries with them, but we also want to be the first there when amalgamated vehicle manufacturers in Kenya decide to go into more localization.

You've got to be able -- so everything that's built around our businesses is following our customers into that market. If you take the opportunity with our customers, the first time they'll build in that market is CKD or SKD parts. They will produce the parts in South Africa, put them in the right packaging and containers, assemble them in that environment. When the volume level there is high enough, then you go into the localization. That's how South Africa started, that's how Kenya started and that's how Nigeria will start.

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Unidentified Participant, [22]

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You have 3 questions from [Paul Ridin] at [Rossendale Partners.] One, could you please give an indication of the revenue and PBT of Hesto? Two, when do you expect last model shifts for Toyota impacting automotive components? And the third question is, can you provide margin differential between exports of model batteries and locally-sold batteries.

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [23]

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It sounds like all questions for Sjoerd.

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Sjoerd Douwenga, Metair Investments Limited - CFO, Financial Director & Executive Director [24]

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Are we going to get it? Are we going to get it

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [25]

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Okay.

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Sjoerd Douwenga, Metair Investments Limited - CFO, Financial Director & Executive Director [26]

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So Hesto, maybe you can talk to the Hesto guys. We haven't disclosed the results. But effectively, Hesto is flat on last year in terms of PBIT. Revenue has grown about 15%. What was the second one?

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [27]

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So if you go through the integrated report, because of IFRS accounting requirements, you can look at the Hesto results separately. But the interim results, we don't disclose the company performance separately. Only at the full year the integrated report.

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Unidentified Participant, [28]

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The second one is when do you expect Toyota model launch to...

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [29]

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2022. So 2021, there's all the other customers, 2022 is Toyota.

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Unidentified Participant, [30]

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And then the third one is the margin differential between model exports and locally-sold batteries.

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Sjoerd Douwenga, Metair Investments Limited - CFO, Financial Director & Executive Director [31]

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So the margin differential at the half year, the local market was just shy of 9%, and the export was just shy of 11%.

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Unidentified Participant, [32]

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Any questions from the line again?

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Cornelius Theodorus Loock, Metair Investments Limited - CEO, MD & Executive Director [33]

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Are we clear from the webcast? Okay. So just from us, Sjoerd team, participants, thank you very much. We look forward to having you the rest of the day. Please, your safety is first in mind. So we will have a detailed safety briefing, especially on man-machine separation and following the pathways in the site visits and wearing your high visibility jackets. Just an apology from me and Sjoerd, we can't join you because we've got some media interviews that run in the background that we'll be taking questions and talking to the result to the market. But we will be available to you. The team members will take you through. And thank you for your participation. Hopefully, we've also framed the results for you that you can ask more involved questions to an Adrian or to a Kim or to Wolfgang or to Juan in regards to understanding the individual businesses and on the interaction with the independent board members.

Thank you very much for your attention and support. And we're very grateful that we could bring a good result to you.