PPC 2022/23 RESULTS POINT TO TOUGH CONDITIONS

JSE-listed PPC says the 12 months ending March 31 have been characterised by different market conditions in each of the markets in which PPC operates, being South Africa and Botswana, Zimbabwe and Rwanda.

In South Africa and Botswana, the market has been affected by a decline in disposable income and the absence of any material increase in demand from infrastructure spending.

Zimbabwe and Rwanda continue to experience growth in cement demand supported by infrastructure spending and retail demand in both countries. The one common factor across the markets has been a significant increase in input costs owing to the rise of energy costs globally, it outlines.

Deleveraging continued to be a priority in South Africa and Botswana. PPC expects net debt in South Africa and Botswana to be between R725-million and R775-million at year-end down from R1.08-billion in the prior year and R935-million as at September 30, 2022.

Gross debt is anticipated to reach PPC’s targeted levels by year-end, which would allow for distributions while maintaining gross leverage at 1.3x to 1.5x the full South African and Botswana operations’ earnings before interest, taxes, depreciation and amortisation (Ebitda), which includes dividends from Zimbabwe and Rwanda.

In Rwanda, Cimerwa’s debt continues to decrease and matures in August 2024. Both PPC Zimbabwe and Cimerwa expect to be in a net cash position at period-end with sustained dividend payments being a key priority.

Cimerwa declared its first dividend in the current financial year, which is anticipated to be paid out before end March.

SOUTH AFRICA, BOTSWANA CEMENT

PPC expects cement sales volumes in South Africa and Botswana to decrease by 4% to 7% year-on-year for the full year.

A decrease of 2.6% was reported for the first six months of the year and the negative trend in market demand has continued in the second six-month period.

These numbers mask a relatively sound performance in the coastal region while trading in the inland region continues to be very challenging, PPC outlines.

In the Western Cape, PPC has been able to increase its market share as imports reduced over the reporting period. Conversely the cement market share of PPC in the highly competitive inland areas has come under pressure following price increases implemented in June 2022 to offset rising costs.

Rising input costs and the objective of maintaining the group’s market share continues to cause margin pressure. Average selling prices (ASPs) for the full year are expected to increase between 5% and 7%. As at September 30, 2022, the ASP was reported to have increased by 5% in the first six months compared with the same period in the previous financial year.

PPC says it will continue with its bi-annual price increases in the 2024 financial year to restore Ebitda margins. PPC contained its production cost inflation to about 11% during the year. Cost mitigation measures and improved operational performance reduced the impact of the external input cost inflation.

Efforts to contain fixed costs and administration or other expenses resulted in these costs only increasing between 3% to 5%, the group highlights. Ebitda margin was 17.6% for the first half and 14.5% for full-year 2022. This declined owing to cost pressures in the first half to a reported 12.2%.

Price increases in the first half of the year have not kept pace with cost inflation and PPC expects the margin for the South Africa and Botswana Cement business to decline to between 9% and 11% for the full-year from 14.5% reported for 2022 financial year.

Recovery of cement demand in South Africa remains dependent on the implementation of the much-awaited and needed infrastructure programmes as well as an improved macro environment, PPC says.

Consumer spending on building materials is not expected to increase in the short term. Despite lower international freight costs, PPC does not anticipate a significant increase in imports in the short term owing to rand weakness and continued port challenges across South Africa, which should provide some reprieve.

However, in the medium term, imports and the associated impacts on direct and indirect employment remain an issue for the South African cement industry.

In addition, PPC notes its concern that substandard cement continues to be sold in the South African market, especially in areas with intense competition. PPC, therefore, continues its engagements with regulators to create a level playing field among local, regional and international competitors.

MATERIALS

PPC operates three distinctly different business lines reported as Materials, namely readymix concrete, aggregates and fly ash. All these business lines are subject to similar construction market trends as described above for the South African cement demand, but are slightly less impacted by changes in the retail sector.

The readymix concrete business is a significant consumer of PPC cement and is expected to have similar sales volumes in the full year compared to the previous year on the back of growth in market share.

The aggregates business serves its customers from two quarries. The easing in demand across its customer portfolio has caused an expected decline in sales volumes in the full year of 20% to 25% compared to the previous year. The fly ash business expects a decline of sales volumes similar to that of aggregates.

Unlike cement factories, the operations in Materials are fully exposed to loadshedding unless backup generators are installed. This has caused numerous disruptions and cost increases. The Ebitda contribution of the Materials division reported a loss of R14-million at September 30, 2022, for the first six months of the year. For the full year, PPC expects this negative Ebitda contribution to increase disproportionately.

In the second half of the year, a turnaround plan was formulated that will significantly decrease the fixed costs associated with the Materials business, it says, with the plan to be implemented this and next month.

In Zimbabwe, PPC Zimbabwe expects sales volumes to decline by 14% to 18% compared with the previous year. The outlook for PPC Zimbabwe remains positive and it is expected that Ebitda and Ebitda margins will continue to recover to the levels of full-year 2022 over the coming months. For full-year 2023, PPC received USD8.8-million in dividends from PPC Zimbabwe. The bi-annual dividend declarations are expected to continue and grow over time.

In Rwanda, Cimerwa expects sales volumes to be more or less flat for the full year and an increase of ASP in the range of 14% to 17%. Material future growth of sales volumes depends on the speed of implementation of planned investments to increase Cimerwa’s capacity.

Despite maintenance costs associated with the kiln stoppage in the second half, Cimerwa expects to report Ebitda margins in the range of 28% to 32% for the full year.

The outlook for cement demand in Rwanda and eastern Democratic Republic of Congo remains optimistic although PPC does note increased competitor pressure both in Rwanda and from neighbouring countries.

The shareholders of Cimerwa approved the payment of a Rwf10.5-billion dividend at the annual general meeting in February. PPC expects Cimerwa to pay 51% of this dividend late this month.

Net working capital (NWC) in South Africa and Botswana is expected to increase by R60-million to R80-million driven by the need for additional inventory to optimize kiln shutdown periods.

The financial positions of both PPC Zimbabwe and Cimerwa remain solid with both companies reporting positive free cash flow after capital expenditure and NWC movements. Both companies will end the financial year in a net positive cash position.

Future capital expenditure requirements for both these companies will not require financial assistance from PPC South Africa and Botswana.

OUTLOOK

PPC plans to implement further cost-reduction measures across its portfolio to protect and restore Ebitda margins. This is, in particular, important for South Africa, where the business environment is expected to remain difficult as loadshedding and other challenges persist.

Further cement price increases will be necessary to ensure the long-term sustainability of the domestic industry and PPC will continue to implement the required price increases. However, PPC remains prepared and able to activate additional capacity when the impact of infrastructure programmes materialises, it says.

The subsidiaries outside South Africa and Botswana are well positioned to continue to deliver a strong performance with regular and increasing dividend declarations to South Africa, PPC notes. With the South African gross debt-to-Ebitda ratio expected to be at the stated optimal level, PPC intends to prioritise returning cash to shareholders through dividends or a share repurchase programme in the absence of any value enhancing corporate activity