Capral Limited (CAA) Earnings Call Transcript

Thank you for standing by, and welcome to the Capral Limited First Half ' 25 Results Webinar. [Operator Instructions] I'd now like to hand the conference over to Mr. Tony Dragicevich, Chief Executive Officer and Managing Director. Please go ahead.

Good morning, everyone. As Darcy just said, my name is Tony Dragicevich, CEO and Managing Director of Capral. It's my pleasure to welcome you to our half year results presentation for 2025; and I'm joined today by our CFO, Tertius Campbell. We'll present what we believe are a fairly solid set of results given the current tough market conditions. So this morning, we're just going to run through our agenda as I'll run through an overview and the highlights of the business. Tertius will then cover off detailed financials. And I'll be back online then to talk about the strategy and the outlook and guidance. So just turning to the overview of the business. I'll talk a bit about Aluminium here. It's obviously what we do, and we're a key part of the Australian aluminium industry. So aluminium is used in a wide variety of applications. It's both strong and lightweight, making it a preferred construction material in buildings, transport, marine and many other fabrication applications. And because it is lightweight, aluminium also plays an important role in reducing carbon emissions, especially in all the transport-related applications like [ electric ] cars, trucks, planes, boats, et cetera. Aluminium is also important to the Australian economy as Australia is one of the few countries in the world that has a fully integrated aluminium supply chain from bauxite mining, alumina refining, aluminium smelting and downstream manufacturing of aluminium extrusion and fabrication where -- its where Capral fits in. So primary Aluminium is actually Australia's largest manufactured export burner and the industry in totality is responsible for over 20,000 jobs. So Capral is the Australia's largest and leading producer of aluminium extrusion, and we're the #1 distributor of extrusion and plate and value-added services. So turning to Page 4, our business in summary, we've got 6 manufacturing plants, 8 extrusion presses. All of our plants are from our Queensland plant a single press plants. The Bremer plant in Queensland has 3 presses in a paint line. Annual extrusion capacity 65,000 tonnes, overall 22 distribution centres. Our key markets are residential and commercial building and a variety of industrial segments. We have around 27% share of the overall aluminium extrusion market in Australia. And our turnover in the last 12 months is about $665 million with over 1,000 employees, so a reasonably substantial business. So turning to the half year highlights. Our earnings were in line with expectation. Lower volume However, that was offset by higher LME-related pricing, lifting our sales revenue above last year. Industrial demand has softened and residential demand remains soft but steady, and we expect a recovery in the second half. Margins are holding up well due to effective cost management and recovery. So now turning to the performance highlights for the first half. A solid earnings result in a soft market, in line with our expectation and guidance. This demonstrates Capral's ability to deliver solid earnings in what is a relatively soft market. Our volume at just over 31,000 tonnes was 7% down on the prior half year. As I said, our sales revenue $327 million was up 4% due to higher LME prices and mix. Our underlying EBITDA at $27.7 million was around $1 million down on last year, so down around 3%. Our net profit after tax, $15.3 million was above last year, but did include a $2.5 million recognition of future tax benefits given our forecast earnings for the next few years. Earnings per share on that basis were $0.89 a share, up on the same period. Balance sheet remains strong. Net cash of $53 million. Net tangible assets increasing to $11.67 per share. Our share buyback program, which we started a year or so ago, continued for the first half of 2025 when we bought equivalent back on market at $0.27 per share compared to the $0.18 under that share buyback program for the last year. Tertius will speak more about our capital management program later in the presentation, so that there will be no interim dividend declared as a result of our share buyback program. Pleased to report improved safety performance in the first half of the year, our total reportable injury frequency rate falling to 5.9, which we believe is one of the leading safety performance rates in the building products industry in Australia. Turning to Slide 7. Talking a bit about our volume in a little bit more detail. So overall volume, as I said earlier, was down 7% on prior year. Market conditions were softer, mainly due to continuing weakness in the residential housing market and a slowdown in the industrial sectors, especially infrastructure projects and transport. Capral also experienced reduced demand from other aluminium resellers. We're starting to see imports of fully fabricated windows have an impact, historically, mainly in high-rise buildings, but now making inroads into low-rise residential market. This is of concerning to our industry, while it's not epidemic proportions, it is certainly increasing and is giving cause for concern, and we're assisting the Australian Windows Association in terms of looking at fair playing field around the imported windows. Industry diversification supports our volume during cyclical downturns in both housing and industrial. Our exposure to the housing market has reduced to around 40% over recent years and with increased exposure to the industrial sector now at around 50%. In terms of cyclicality and seasonality, we're expecting a stronger second half in 2025 due to normal seasonality and the lift in the housing sector starting to flow through into the second half. Turning to Page 8, where we talk about the residential housing market in a bit more detail. Housing commitments remain soft. However, we are expecting a recovery in the second half of 2025. The market slowed over the last few years impacted by higher interest rates and affordability. Housing starts for 2025 are forecast at 181,000 up around 8% on prior year, but still down around 20% from the highs of 2021 and 2022. We're expecting a stronger second half 2025 on the back of the reducing interest rates and immigration-driven demand and the outlook for 2026 and 2027 is looking more positive for the residential market. We know there's significant pent-up demand for housing in Australia with immigration remaining high. And with interest rates falling, this market should continue to rise over the forthcoming years. I'd just like to share with you now if we turn to Page 9 of the presentation, some recent projects that we've completed just to give -- not only give you an indication of some of the jobs we've completed, but also where our products end up. So here, we have 3 residential projects, 1 in New South Wales -- 2 in New South -- or all in New South Wales this year. Obviously, we operate nationally. So these are from our -- some of our key window fabricators, master windows, thin windows and doors and PCW commercial on the Central Coast and some high-quality homes being built using Capral's residential and AG (sic) [ AGS ] Glazing System products. On the next slide, we look at some of our recent commercial projects, a commercial building in Brisbane for ARUP; and Oval in WA in Bunbury WA with one of our large fabricators over there, LGA, using our framing systems for all windows and doors on that particular stadium. And then like -- a reasonably large commercial building here in New South Wales, The Nippon Express, where ADS glass and aluminium produced all of those window systems, as you can see, framing systems you see in that particular building. So we just show you these projects to see where the Capral's products end up in the residential and commercial sector. Turning now to the key industrial markets. So the Industrial sector has softened for the first time in a number of years. The Transport Infrastructure and Manufacturing markets have slowed this year after 4 years of significant growth. The Marine and Cladding sectors remain reasonably solid. You can see there from the slide or the graph on the bottom left-hand corner, the growth in the transport market driven by new truck and van builds over the past 4 to 5 years from a low in 2020 to continual growth in that sector, driven by activities, particularly around movement from -- into online shopping and the construction of large warehouse facilities and distribution points and requiring distribution. So -- that market has come off this year for the first time in the last 5 or 6 years, and truck builds have gone from having very large and long order books to relatively modest ones. So that's impacted our volumes in the first half. We do expect it to improve a little bit in the second half. The Marine markets remain pretty steady, primarily driven by commercial ferry demand from our 2 large shipbuilders in Tasmania being Incat and Richardson Devine Marine. And Austal shipyards in WA are busy building defense and border force vessels. Unfortunately, those vessels contain a higher steel element than aluminium, but still a very large customer for us in that Marine sector. In terms of Solar, this market has been challenging due to imported aluminium solar rail dominating this market. Unfortunately, most of the distributors of aluminium solar rail are actually overseas-owned ventures who import from their home countries, mainly China. And this market is very hard on for us to crack. We do have a small share with some key distributors, which we support. And we also formed alliances with those companies operating under the government Sunshot project initiative, and that provides opportunities into the future. So it's really about aligning with potential Australian solar panel manufacturers going forward. Industrial construction infrastructure has certainly slowed down this year. We saw from 2021 to 2024, significant government-funded infrastructure growth, particularly in the major capital cities on the East Coast of Australia. And those -- a number of those projects are nearing completion, and we started to see a falloff in activity levels in this industrial construction area. However the Cladding sector continues to remain strong and aluminium has become the preferred material to be used in facades and sunshades, and we are enjoying good growth out of that market. The Manufacturing and General Fabrication markets are slowing. We've seen when interest rates started to rise, we saw an almost immediate impact on the residential housing market. But those continual interest rate rises over the last few years have finally started to see a slowdown in the general economy and our manufacturing and general fabrication markets are starting to slow down as a result of that. Resellers, we do sell around 8% to 10% of our volume goes to other aluminium resellers. It used to be a much higher percentage of that as we grow our direct business. But those resellers have largely returned a decent amount of their volume to imports. And -- but in response to the positive antidumping outcomes, which we'll talk a bit later in the presentation, there is some opportunity to grow a bit more share back into that part of the market later this year and into next year. On the next slide, we take a little bit of time to talk about a couple of key industrial customers and projects we've completed in the last 12 months or so. The Western Sydney International Airport, Capral supplied all the ceiling battens and structural spine for the new international airport terminal at Badgerys Creek, and we've got a short video, just one of our "Crafted with Capral" videos to show -- showcase that project, which we'll show you in a minute or so. Laboratory project for Workplace Solutions in Mitchell Park in Victoria for Westlab and also showcasing Volgren, one of our large transport customers. They're a bus builder in Dandenong in Victoria. So I might just now show you the -- share with you the Western Sydney International -- this is a cutdown version of our Crafted with Capral videos for this particular project, which we are proud to be part of. [Presentation] Okay. Well, I hope you enjoyed that little video. Just it's very nice, and we're very proud of Capral to be able to be part of that iconic project, the new Western Sydney Airport and a number of parts of our organization were involved in that over a period of 12 months where we supplied over 700 tonnes of aluminium batten and all of the spine, which we value added through our routers to supply that -- the spine for that particular facility as well. So unfortunately, that project came to an end late last year, and that hasn't been -- we haven't found another airport to build, but we're looking for other projects. So -- but certainly a really nice one to put on our CV. Okay. I will now hand over to Tertius to run through the financials in a little bit more detail.

Thanks, Tony. Let me take you through some of the numbers behind the story. So volume were down 7% on last year, as Tony mentioned. Despite that, earnings have held solid. That's a result of disciplined cost control, product mix and margin management. Inflationary pressures in wages, freight, energy are real to us. But we've offset much of that through efficiencies. Margins are holding up, and that's a strong outcome at this point of the cycle. Now let's move to metal cost. Aluminium prices have been volatile this year. Average LME was up 13% on last year, rising sharply in the first quarter, then falling back and now rebounding again and forecast to remain at elevated levels due to the pent-up global demand, easing of interest rates and China no longer expanding their capacity. For us, higher LME means more cash tied up in inventory and receivables. It's something we can't control, but what we can control is how we price, how we manage our procurement and how we manage margins, and that's exactly what we've done. Turning to earnings. Revenue was up 4%, mostly due to higher pass-through metal costs and to a lesser degree, mix. Underlying EBITDA was $27.7 million, down 3% and EBIT of $16.1 million. Significant items was the LME revaluation due to the price dropping sharply at the end of the first -- second quarter and higher stock levels. Net profit was $15.3 million. That included the recognition of $2.5 million of deferred tax asset, reflecting our confidence in future earnings. The bottom line, even in a lower volume environment, earnings growth per share were up 8% to $0.89. Next slide on the balance sheet. We remain in a strong position. Net tangible assets per share are now $11.67 and net cash sits at $53 million. We've refinanced our new $75 million syndicated facility, adding flexibility for growth. Our receivables remains excellent at 44 days. The key messages here, resilience, we're net cash positive, well within our banking covenants and positioned for opportunities. Next slide. Cash flow -- cash flow this half reflects those higher aluminium prices. Working capital rose by $17 million. CapEx was modest at $4.3 million, in line with plan with around $6.5 million planned for the second half. We also returned $11 million to shareholders. The result is a free cash outflow of $4.6 million versus an inflow last year. Importantly, this is just timing. Over the cycle, cash generation remains strong. Slide 8 is the capital management. In the first half, we bought back almost 450,000 shares, returning equivalent of $0.27 per share. Franking credits, as we mentioned earlier, are exhausted. So no interim dividend was declared. Our preference remains buyback, while the share price remains below -- or trades below the normalized NTA. Buybacks are accretive to earnings per share and to long-term value. Buybacks will resume on next Monday on the 25th. Over the past 4.5 years, Capral has delivered a total shareholder return of around 138%. That's a compound annual growth rate of roughly 20% per year. Over time, we remain committed to distribute 40% to 80% of underlying earnings, whether that's through buybacks or dividends or a combination of the 2. We'll always take the most value-accretive route. Disciplined, transparent and consistent is our approach. To sum up, solid earnings despite softer demand, strong balance sheet and disciplined capital management. That combination gives us resilience at the bottom of the cycle and a real leverage to the recovery we expect to start in this second half. Anthony, I think that's the only comments I want to make about the detailed financials.

Yes, we can take any questions at the end of the presentation. So moving now on to the strategy and outlook. As an organization, we continue to focus on getting good returns on the investments we make, improving our competitive position and growing our presence in the Aluminium Distribution industry in Australia. So turning to the next slide, our strategy, which has remained consistent over the years. We don't really change significantly what we do. But we continually have objectives and updating our plans every 12 months or continuously. So this -- our strategy is built on 3 things: building on our strengths, which is our range, our scale. We're the only national extruder and distributor, our capability and our people. Continuing to optimize what we do. One of our key values at Capral is better every day and something we strive through all parts of our business. So it's continuous improvement in all aspects: customer service, manufacturing productivity, technology, supply chain optimization. And the other third pillar is growing for the future. So leveraging these capabilities to develop new products, expand our distribution footprint and into adjacent markets. And I'll talk a little bit about that shortly. Okay. So turning to the next page, I just want to run through in a little bit more detail some of the key things that are underway in the business currently. So first of all, with our manufacturing operations, we completed the first stage of the Penrith plant upgrade, which is replacing the extrusion press, that was completed in late 2023. The second stage, which is replacing the billet furnace and saw was completed last month. We had planned to complete it earlier in the first half of the year, but due to some equipment delays or delivery -- delay in delivery, we completed it during June and July. It's a significant project. The plant was down for close to 4 weeks, replacing the whole furnace, which was 40 years old and the saw. So planning for the final -- the third and final stage is well advanced in terms of planning, which will be all of the material handling and packing end of the plant, and that will be completed towards the end of 2026. We're also in the process of upgrading our shop floor control systems within our plants with 4 plants completed and 2 remaining, and that will take place over the next year or so. Moving on to our Distribution business. We continue to grow our distribution operations with the objective of Capral growing our direct-to-market channel. In our Building Systems business, we released a new Residential Window Framing system last year, and we've added to that this year with a thermally efficient variant, and that was launched in the last couple of months in response to changes to the National Construction Code looking for more thermally-efficient building systems. On our industrial side of our business, over the last few years, we've acquired 4 aluminium trade centre businesses. We continue to seek other opportunities to expand our distribution footprint geographically and also into other adjacent market segments. We recently announced the acquisition of Comsupply in WA, an acquisition cost of around $6 million, so a modest acquisition. This is a $15 million revenue aluminium systems and hardware business, and that transaction is due to complete fairly next week. Our plan is to -- this is a very well-run business with around 350 customers in WA, focusing on partition systems in particular, and specializing in hardware for both the residential and commercial market. The reason for buying this business is not to buy a well-run business in WA, but to use this model as a blueprint to be able to take us into the major markets and growth in this area of our business in the major markets on the East Coast of Australia. In terms of sales and marketing, we continue to invest in technology to improve our sales effectiveness. We've launched a new website and eStore in the last year or so. Earlier this year, we joined the Australian Made campaign, and you can see that logo being featured at the top of this presentation, but more importantly, on all of our extrusions as it's manufactured. And we think it's really important for our business going forward to be associated and our customers with the Future Made in Australia program, the government is rolling out and also the Australian Made campaign, which has been in existence for some time. We continue to promote our partnerships with our customers through the Crafted with Capral series of videos that we've just seen the one for the Western Sydney Airport. We produce about 5 of these per year. They're very well regarded by our customers who also use them to showcase their business and also to showcase the partnership that we have -- that they have with Capral. Okay. Turning to Page 22, and I just want to spend a little bit of time on this particular slide. It has been the topic of conversation around the world in the last 12 months, I guess, with the new change in government in the U.S. The trade and tariffs will become almost a daily discussion. First of all, I just want to say that Capral continues to lead the local extrusion industry in the pursuit of fair trade. We chair the Australian Aluminium Council Fair Trade panel, which consists of the other extruders in Australia. So all the work we do on antidumping is on behalf of the industry. Because we are the largest and only national player, we take those cases and investigations are done with us leading them, but it's done on behalf of the total local industry here in Australia. So just in terms of the global context, and I've spoken about this previously, the U.S. tariffs on steel and aluminium, obviously, particularly for aluminium for us, have no direct impact on Capral because we don't export anything to the U.S. But the resulting changes in trade flows are a real risk, not only to ourselves and our local competitors, but to the Australian industry, wider Australian industry, which is why Australia needs a robust antidumping system in place. In particular, in relation to where we are with measures on aluminium extrusion, the measures we have in place against China expire in October this year. So when we take a case, those antidumping measures stay in place for 5 years and every 5 years, they come up for renewal. And you have to submit an application to have those continued, which obviously we have done. The preliminary report on that investigation or that continuation investigation was released last month, and it's a positive sign that Australia is prepared to stand up for fair and balanced trade. And it's recognition that effective trade remedies are essential to help insulate Australian manufacturers from unfair competition. So the preliminary findings from that investigation recommend a continuation of measures. They recommend a floor price and a modest dumping in countervailing duties. The final report will be issued late October. There has been significant response to this from importers and exporters out of China. There's been a number of submissions gone up on behalf of those with vested interest in supporting imports. And we're working with our customers and with our other local competitors to reinforce the commission's -- sorry, the Antidumping Commission's position that they've come to in their preliminary report. So it's a positive outcome. It's still to be confirmed, and it's a step in the right direction for ensuring a level playing field, particularly against dumped aluminium extrusion coming into this country and in the political environment in the global context we're currently in, it's very important for our industry that this threat to local manufacturing that we do have reasonable measures in place to ensure that we can compete on a level playing field. Just to finalize out this particular slide, we do have measures in place against Malaysia. They're in place until June next year. We've applied for a continuation investigation, which is currently underway and measures against Vietnam remain in place until 2027. When we say that measures are in place against Malaysia, Vietnam and China, there are still exporters from those countries that are able to sell into Australia without dumping duties because they are selling into the country and those products being imported at an undumped and fair price. So this is not about eliminating import competition. This is about creating a level playing field. And while we've made some market share gain -- while local extruders have made some market share gains post COVID against imports, imports still represent over 1/3 of the total aluminium extrusion market. And now the supply chains have normalized and international trade flows are in a state of flux. It's even more important that we continue to fight that level playing field and fair trade for the local extrusion industry. We do contribute over 2,000 direct jobs to the Australian economy. So it's important not only to us, but to our fellow extruders here in Australia. Okay. We do have -- just one other point to note. We do have a new extruder start-up in Newcastle this year, it should be up and running probably towards the end of this year, next year. This site is affiliated with a large Chinese importer who already imported large volumes into Australia currently. Okay. So moving to the next slide, which is sustainability. Our journey to -- we're very active in this space as all companies are with the upcoming reporting regime not far away. We'll be one of the first companies to report under new accounting standards or climate reporting standards at the beginning of next year because we run a calendar financial year. Our journey to net zero emissions by 2050 is on track. We have a 20% reduction target by 2030, and we're well ahead of that target to date. We are -- importantly, we're the only ASI certified provider of lower-carbon aluminium in Australia. This enables us to offer certified lower carbon aluminium through our trademark brand, LocAl. And I think you would have seen in that Western Sydney Airport, a video that the -- it was part of the -- one of the reasons why Capral was selected as a vendor for that -- or a supplier to that key project was that they were able to supply that lower carbon alternative aluminium to them during -- for that project. One of the key things this year we focused on is enhancing our data capture capability for climate change reporting and getting -- and making sure that it's very accurate because it is audited -- it will be audited. But we're very well placed to meet the requirements of those new reporting standards as they come in place at the end of this year -- for the '25 year. Okay. Now turning to our outlook and guidance. So based on a forecast lift in market conditions, primarily from the residential market, we expect earnings for FY '25 to be broadly in line with prior year, which is maintaining the guidance we last gave at our AGM address, Tertius. The markets are certainly a little bit softer or a bit softer in the industrial side than what we had anticipated. But providing we see the lift starting to flow through from the increased residential housing market approvals and commencements, we should see that lift in the second half of this year as interest rates continue to fall. So total residential starts in 2025 are forecast to be higher than the year before. And on the back of that, we are starting to see that market start to flow -- some of those volumes beginning to flow through into our manufacturing operations. As I said, the industrial markets and commercial markets have softened, but we do expect that to be offset by a lift in the residential activity. Tertius spoke about LME, and it is volatile and subject to global factors. As Tertius said, it rose sharply at the end of last year and in early '25. Then in the second quarter of the year, it fell quite sharply and at a time when we had quite higher stock levels of billet. But it has since rebounded is expected to remain at elevated levels during the remainder of this year and probably into 2026. But there's many factors at play and that volatility is sure to continue. Inflationary cost pressures continue to impact especially employee, albeit employee wage rises now coming back to more normal levels. Energy remains challenging with cost of energy still continuing to increase, and we're still seeing modest increases in packaging and freight costs. The area that is impacted the most by the higher metal cost is our working capital levels, both in our debtors' levels with higher selling prices and higher costs in our inventory. So that will be a drain on our cash in the -- has been in the first half, it will continue to be in the second half. Our capital expenditure this year is planned to be at around $11 million. Some of that -- the biggest project, as I said, was the Penrith Stage 2 project, but a number of other maintenance capital expenditure projects to conclude through the rest of this year. And so on this basis, Capral will be in a position to continue our returns to shareholders, firstly, in the form of on-market share buybacks topped up as necessary by unfranked dividends if required. Okay. Well, thank you for your attendance this morning and listening through that presentation. We do have an appendix there, which shows our footprint for those of you that are interested. But we'll now open up to any questions that all you may have.

[Operator Instructions] Your first question today comes from [ Simon Samuel from Delta Asset Management. ]

A couple of questions. The accumulated losses, which provide the income tax benefit are in the order of $330 million still. Is that all available to use as income tax credit offset, whatever you want to call it?

Well, the -- it's not $300 million. It's just over $200 million in total. And we have different types of losses, but the bulk of it is same business test losses, but they're all available, yes. It's all operational losses and no capital losses.

These losses were generated 15 to 20 years ago. And while we have reduced them significantly from around $400 million over the last decade, they are still significant.

So leading to that is that you won't actually be paying any tax for probably, let's say, $50 million a year, 5 years, let's say, is that about right?

In that order, depending on, obviously, our assessable income every year. But it's -- for the foreseeable future, yes.

For the next 5 years at least.

Yes. Okay. And then the second point is the share buyback. Now you paused that come the first of [ H ] -- the period of the new tax or the reporting season every 6 months. Now I can understand why you would do that for directors, but why do you need to do for the company? Surely, if you continue to do the share buyback?

Our policy states that we've got a blackout period between the close of financial year and until reporting of the financial results. So that's part of our stated policies. So that's why we close off.

But is that not a bit superfluous? I mean that policy sounds like it's something from a very long time ago. I just would have thought that you're limiting yourself, you're cutting off 6 weeks of the year in which to -- twice, in fact, in which you can conduct share buyback, albeit not buying a whole lot, but that's opportunity missed in a fairly illiquid market.

Simon, all I can say about that is, I mean, we're not a specialist in this. We've had external advice, and that was the advice that we've received as to best practice not to do buybacks during that period. But we'll definitely take it on notice and have a discussion on that as well.

Okay. Well, I don't think any other company does that to the degree you do. They might restrict their directors from buying shares in a blackout period. But anyway, I'll leave it with you.

[Operator Instructions] Your next question comes from Andrew Johnston from MST Access.

Well done on a good result in spite of or certainly not as bad as the volume decline that we saw. So just focus in on measure of earnings per tonne. Can you talk about -- because we certainly had improvement even in EBITDA per tonne. Can you talk about the drivers of that stronger performance of earnings per tonne?