Good morning, ladies and gentlemen. Thank you for your attendance. This is the presentation of the results of KAP Limited, unaudited for the six months ended 31 December 2024. I'm going to start with an operational review, followed by Frans on the financials, and then I'll come back with the outlook, and then we'll take questions at the end as per our normal format. I think just the key takeaways from the results. Broadly, it's been a period of a lot of positive sentiment: the successful GNU following the national elections, the Two-Pot R etirement System, a suspension of load-shedding, lower inflation, lower interest. Generally, a positive sentiment environment. However, we haven't seen that translate into our trading environment as yet. We believe it will come; however, it's going to take time to actually filter down to operational level.
Just in terms of the period, our highlights: we are really pleased that we have ramped up our major projects, the largest of which is PG Bison's new MDF line, and these obviously offer great growth opportunities for us going forward. A big milestone in terms of actually ramping them up. We've made good progress in selling the MDF that comes out of that new line. I think what's important with this is that we've managed to retain our debt levels stable with this time last year, despite significant expansion Capex in terms of these projects and an increase in working capital associated with the extra volume that we're doing. We had improved performances for Safripol, Unitrans, and Sleep Group, which is previously Restonic. Obviously, from a low-lights perspective, ramping up major projects of this nature obviously has an impact on short-term earnings.
You're in a position where you have 100% of the costs at the same time as starting the project from scratch and slowly building up sales, and that impacts on earnings in the short term. Likewise, in Feltex, we had some lower volumes from our OEM customers, which weighed on our results, and then Optics remained below our performance expectations as we continue to invest in that business in developing product and infrastructure. Just looking at the results in context, we've completed a major CapEx cycle: ZAR 2.5 billion over and above our normal CapEx. There were no material delays or overspends in this. All those projects are fully operational within the six months. Our balance sheet's intact. We're ramping up the sales, and there's an obvious impact on our results. In that context, I'm actually quite satisfied with the results for the six-month period.
If we look at revenue, a 2% increase in revenue, the two big contributors there being PG Bison related to the expanded capacity and Safripol, predominantly related to increased production capacity and increased sales. Unitrans, down largely as a result of suspending low-return, low-margin work, and then Feltex as a result of the lower OEM volumes and a new model introduction in that division, which I'll elaborate on further. From the operating profit perspective, down 8%, largely impacted, as I said in the introduction, by PG Bison's ramp-up of the new plant and by Feltex in terms of lower OEM volumes and a new model introduction. If we get into the operational update then, let's start with PG Bison. Revenue up 5% to ZAR 3 billion. Operating profit down 28% to ZAR 413 million.
Operating margin down from close to 20%- 13.6%, which still is actually a very healthy margin at operating profit level. As I mentioned earlier, the ramp-up has been successful, and largely the operating parameters are within our feasibility metrics. In terms of efficiency levels, yield, etc. Sales volumes increased by 6%, largely as a result of the additional capacity. That resulted in MDF sales 20% higher and exports up 28%, largely the MDF volume. We managed to maintain our value-add ratio at a healthy level, 64% relative to 66% in the prior period. As I mentioned earlier, the ramp-up had a significant impact on our results. We absorbed additional operating costs of ZAR 135 million for the period, together with ZAR 40 million in extra depreciation, while the utilization of the plant started on the 1st of July, day one, at zero, and then ramped up.
Not optimal utilization, sales, volumes, and pricing at this stage. We remain positive about the outlook, though, for this new capacity. It really provides attractive growth opportunities for us. If we look at MDF, it remains a growth category within the decorative panel sector globally, and this expansion provides globally competitive manufacturing costs. That was one of the key reasons why we embarked on it. The operating margin will improve over time just as we ramp up production and as sales volumes and the mix and territories within which we sell start to normalize. If we just go back and recap on the actual project, just in context of what I've discussed, the project scope was for 274,000 meters cubed per annum, so that's a 33% increase on PG Bison's total capacity.
It cost ZAR 2 billion, and construction commenced in April 2021, and we commissioned in June 2024. As I say, no material delay or overspend in terms of that project. The rationale was to consolidate our position as a leading decorative panels producer in Africa and to service, as I said, a growing MDF market within the decorative panel sector, both within South Africa and Africa primarily, and then to create export opportunities. We have successfully ramped up production levels and yields in line with the project feasibility, as I mentioned. We have given ourselves four years in terms of the feasibility to sell the full capacity. We will obviously endeavor to do it sooner; however, it is too early in the project to differ from the four years that we have stipulated. We have a very clear sales strategy in terms of the markets that we are targeting.
Initially, our primary markets, which are our domestic and African territory markets, where we can generally truck the product into those markets, and then deep-sea markets as secondary markets to really supplement those primary markets and allow us to bring the plant to full capacity. If we look holistically, currently global selling prices are relatively subdued in line with other commodity prices, and that's generally due to subdued global growth. We see that normalizing as we go forward. Just in terms of the financial return, we're looking at a post-tax IRR of 15%-16%. It's based on a 20-year cash flow. Bear in mind, this plant replaced about a 37-year-old plant, so when we look at these, although we're basing our IRR on 20 years, this plant is likely to run for a good 40 years odd.
As we noted, the forecast cash production cost is internationally competitive, and when we compare it to our own operations at Boksburg, where we also produce MDF, it is 20%-25% lower as a cash production cost. It obviously supports significant localization and job creation across the forestry panel and downstream value chains. If we then move on to Safripol, a good improvement in Safripol's performance. We completed here again a major project, ZAR 400 million-odd, and that was to convert one of our HDPE lines to be able to produce higher specification products with more durable applications and less single use, as well as to replace a major extruder. That was commissioned and is up and running at full capacity and at feasibility yield within this period. Production increased by 23%.
In the prior comparative period, we had some significant disruptions in terms of ethylene raw material supply, as well as some Eskom disruptions and a transformer failure as a result. We did not have that repeating in this period, so 23% higher production. That gave us the ability to obviously sell more. We had a 5% increase in domestic sales with the balance made up in exports. We found HD markets to be relatively subdued, which forced us into export markets on that product. Exports made up 13% of sales volumes in this period compared to 9% in the previous period. Operating profit was up 58% on the back of those increased production volumes and the improved HD efficiencies, which put us at ZAR 282 million for the period. Raw material margins remained low, so the sector remains in a cyclical low period.
We expect that to start coming out roughly in FY2027. We expect margins to remain at the subdued level as we go forward, and that yielded an operating margin of 5.4%. Looking at Unitrans, a pleasing performance coming out of Unitrans, revenue at ZAR 4.95 billion, down 2%. As I mentioned earlier, that is largely as a result of terminating low-return, low-margin work. Operating profit up 22% on the back of the restructuring and efficiency-focused activities that we have engaged in, and then operating margin at 6.5%, not yet at our target, but certainly making progress from where we have come. The increase in operating margin and profit were supported by the restructuring, as I mentioned. We saw improved performances coming through from the agriculture, the food, and the passenger-related activities. Mining was relatively stable, while petrochemicals we saw down on the prior period.
It should be noted that the prior period also had some currency devaluations in some of the neighboring territories where we operate. That did not recur in the current period. The restructuring that we initiated, it has been quite a long and onerous process, unfortunately. It commenced in FY2023. We have made really good progress in the last 12 months and especially in the last six months. The organizational redesign was completed in November during the reporting period. We had set ourselves a target of ZAR 300 million in savings through termination of low-return work as well as direct cost savings, which put us on a target of reaching ZAR 700 million in the FY2025-2026 medium-term period. That remains on track. In addition, we set ourselves quite ambitious targets in terms of certain return metrics, which involved really improving the asset rationalization and efficiencies of the asset base. That continues to progress.
As a result of that, we remain in a capex-restricted environment until we've reached the targets that we would like to get to. Overall, a pleasing performance for Unitrans. If we look forward on Unitrans, we've put a new management team in place. It's functioning very well. With that, we've got a clear strategy, and the implementation is progressing. We seek to provide end-to-end supply chain services in those primary sectors of agriculture, food, mining, petrochemical, and passenger, which really form a foundation for our economy at the end of the day. Those are our focus areas. We continue with our efficiency measures. However, we are turning our focus towards top-line growth now as well. That is largely organic with existing and new customers, with the required margins and returns, and predominantly in a specialized space.
That is where we have been successful in the past and where we will continue to seek growth. I think if we just look at the disruptions taking place in industry, of which there are several, they certainly present certain challenges, but at the same time also present certain opportunities. It is really in those opportunities where we seek to find opportunities for Unitrans to grow. If we then move on to Feltex, it was a tough trading period for Feltex. OEM volumes were down by 19%, leading to a 16% reduction in revenue to ZAR 1.157 million. If we consider six of the seven OEMs that operate in South Africa, they were actually down in the period. It was a really difficult environment for this division. Two of them were down significantly. One was a model changeover, so the new X3.
It was, in our minds, a successful changeover, and they are back on a three-shift system from January, which is really pleasing for us. One of our other major customers has had ongoing technical challenges, which has reduced their build volume, and it is quite a material number in our lives for this division. In addition to that, also quite a tough new vehicle sales environment. LCV sales were down by 15%. SUV sales up by 3%. As I noted, revenue down as a result on the back of assembly volumes, which affected our components business to the OEMs, and then lower LCV volumes, which affected our aftermarket business. As a result, operating profit down 69% to ZAR 42 million and operating margin down to 3.6%, which is well below our expectation for this business.
It should be noted that the prior year includes ZAR 19 million in insurance benefits coming from the KwaZulu-Natal floods from that time. Looking forward, as I noted, the model changeover is back on a three-shift. We are hopeful that the technical challenges at one of the OEMs will hopefully dissipate in this H2. Certainly looking for a better performance from this division into the second half of the financial year and then into F2026. Lastly, Sleep Group, really pleasing performance. Revenue up 4% to ZAR 1 billion, operating profit up 12% to ZAR 111 million, and operating margin up to 11%. Starting to approach a level that is more meaningful for us. The increase in revenue and profitability is largely as a result of an increase in bedding units. That is our primary focus market.
Sales volumes of foam were down by 15%, partly market-driven and partly as a result of exiting certain low-margin, low-value work that we were doing in that business. Our textile business declined by 9%, so an indication of a subdued marketplace of bedding. Operating profit up by 12%, as I noted, and that was largely as a result of the higher bedding volumes. Big focus on cost management and efficiencies following a restructure that we completed in that business, and then also improved procurement benefits coming through. If we look going forward, we seek to continue growing revenue and margin. It's a big focus area for us. We've invested a lot in the marketing, the sales, product development, demand creation activities, promotional activities, and we've really seen that in the top-line growth and volume growth.
That will continue, and then we've also supported that with investments in the expansion of our facilities, upgrading one of our foam lines, and installing a new fiber tearing line, which gives us increased raw material benefits and, at the end of the day, a superior product. A big focus area will be the turnaround of our foam operations, so that comprises 12% of our revenue for the half. It remains in a tough industry, tough sector, and it is a significant focus for us in terms of getting that business back to levels which we are comfortable with. With that, I'm going to hand over to Frans to go through the financial review, and then I'll come back at the end just to talk about how we see the way forward. Over to you, Frans.
Thank you, Gary. Good morning, everyone, and thanks for taking the time to come and listen to us. Firstly, on the salient features, just to highlight a couple of items: revenue up 2%, EBITDA down 4% to ZAR 1.9 billion, operating profit down 8% to ZAR 1.2 billion, and that resulted in headline earnings per share down 21% to ZAR 0.172. Our net interest-bearing debt stayed stable compared to the same period prior year at ZAR 9.3 billion, and a big positive for us in these six months is that all our major capital projects were successfully ramped up.
If you look at the consolidated income statement, to highlight a couple of items, firstly is operating profit down 8%, and that's largely due to the PG Bison MDF line that was commissioned and the impact of that on the six months, and also FELTEX with the lower industry new vehicle build volumes. That was partly offset by improved performance in Safripol, Unitrans, and Sleep Group, and that was well explained in Gary's operational update. Also, there was a 20% increase in your finance costs. That is mainly due to the capitalized interest in the prior period of ZAR 82 million, which did not happen in this period. It all went to the income statement as all those projects are now complete and operational. The impact of both of those resulted in a 21% decrease in headline earnings per share to 17.2 cents.
All of these items were expected in our forecast, so none of these are a surprise to us. If you look at the tax rate recon, it's only one item I'd like to highlight, is the government grants where we received an additional 12I on the PG Bison MDF line. That takes down your tax rate from 27%- 26%. If you take the excluding the once-off profit benefit of the PG Bison 12I grant, we calculate like adjusted headline earnings. The impact of that is 0.3 cents, taking profit headline earnings per share down to 16.9. We expect that that 8 million benefit will also occur in the second half. It's the way we've accounted for the F25 benefit.
Just to remind you, in the prior year, in the full year, in June, we commissioned the plant, and there we received ZAR 213 million in tax benefit, which was ZAR 0.086. From a balance sheet perspective, normally at our half-year results, we include three time periods: the current December, June, and the prior December. The reason for that is just to take away the seasonality in working capital if we explain it. Firstly, there are three items to highlight here: property, plant, and equipment. If you compare to the prior December, we were still building those plants. If you compare to 30th June, stable. Net working capital compared to prior period and full year or year-end, both instances up, and that is seasonality one, and it also includes investment in working capital relating to the new projects or additional capacity that we have.
Net interest-bearing debt, stable compared to the prior period and increase from 30 June. That is mainly due to the seasonality in working capital, the difference between the two. If you analyze property, plant, and equipment from 30 June, it is only for the six months, stable at ZAR 16.1 billion. Expansion CapEx significantly down to ZAR 314 million. There is still capital work in progress of ZAR 521 million at December. Most of that, or a large portion of that, relates to still completing the PG Bison line, final items, the MDF line, and also related housing. ZAR 173 million of that balance relates to PG Bison. If you analyze net working capital, I will compare to the same period last year to take away the seasonality. The increase there is ZAR 298 million, and that is, yeah, ZAR 298 million to ZAR 4.2 billion, and that is largely because of inventory.
You can see there on the left side of the graph, it's ZAR 407 million increase in inventory. That is resulting from the new capacity that we've got. With new capacity comes investment in stock and working capital, so that's a permanent increase in our inventory. Also, with those plants, specifically PG Bison and the Safripol plants, there's additional engineering space that comes with new plants. Going forward, there will be a greater focus on optimizing working capital, specifically in PG Bison. We do have more capacity now than our current sales, and we have to export, but also in Safripol, where there will be more focus on aligning our production with inventory levels, with our domestic demand, and our exports that we're able to do. From a cash flow perspective, cash generated from operations is down 18% to ZAR 649 million.
Two reasons, EBITDA down 4%, and also we've invested less in working capital in these six months compared to the same period in the prior six months. Net finance cost paid, that's the actual cash net finance cost that we've paid, is a slight increase of only ZAR 5 million. With the seasonality, our cash conversion is always low in the first six months. We still forecast to achieve our target of 90% at full year. If you look at the investing side of the cash flow statement, we've invested less. Two items to highlight are on expansion capex. There's ZAR 776 million less than in the prior period. On the replacement capex in the prior period, we've benefited from the Unitrans vehicles and trailers that we sold, those underutilized vehicles, and that was ZAR 249 million.
Our free cash outflow improved compared to the same period last year by ZAR 226 million. If you look at the investing activities, I included two slides here with our historic CapEx numbers, one for manufacturing and one for non-manufacturing. The reason for the split is it's the different useful lives of the assets, so it's longer date, shorter date. If you look on that slide there on the left, in expansion CapEx in the last four years, we've invested ZAR 3.6 billion. That's a material number. If you look into F2025, where all those plants were now commissioned, it's materially down. That's plant reduction in our capital.
We're through that cycle now, and there are five projects that basically make up most of the ZAR 3.6 billion, and that I've highlighted in the block there as material or strategic items, and that makes up ZAR 2.9 billion or 80% of the ZAR 3.6 billion. Another thing to highlight on the slide, if you look there in H125, is that our CapEx for the manufacturing businesses is actually lower than our depreciation. If you analyze the non-manufacturing, mainly Unitrans, but Optics is also included here, mainly Unitrans. The redeployment of our assets and the disposal of underutilized assets, we've completed that in FY2024. If you look on the graph there, the negative items at the bottom of the graph are the process on disposals. That was a three-year process specifically, and we concluded that at the end of FY2024. Going forward, you will see a more normalized replacement cycle.
If you look at the replacement CapEx in Unitrans, it is more in line with our depreciation. Net debt increased for the six months compared to June. Remember, compared to prior year, same period, it was stable. For the six months, it increased by ZAR 941 million to ZAR 9.3 billion, and that is mainly because of the investment in working capital in the six months, largely seasonality, but also due to the capacity expansions. We still target our net debt reduction for H2 2025 now, the six months of ZAR 1 billion, and that will be enabled by lower capital expenditure, cash flow from the major capital projects that are now in operation and in the ramp-up phase, and then the continued expected improvement in Unitrans performance. We target also to continue with our debt reduction plan into FY 2026.
If you look at the serviceability ratios, net debt at ZAR 9.3 billion, that gives you a gearing ratio of 72%. That's slightly lower than prior, same period, prior year of 77%. Covenant ratios of net debt to EBITDA are 2.6 times, and EBITDA interest cover of 3.6 times. Both of those well within our covenant measurements, but both of those outside our own internal targets, and we're forecasting to bring that in line with our own targets. If you look at the detail funding activities, when we presented in August, I mentioned that all the maturities for H1 we will refinance. That we've done. We've utilized ZAR 1 billion of the RCF that we've raised in the prior year, so that's now fully utilized. We've also raised a ZAR 1 billion term loan also to refinance the maturities of H1.
On our maturity profile, we have ZAR 3.3 billion in cash and in available facilities at 31st December. If you look at the rest of the six months, there's ZAR 1 billion in debt repayments, so that links to our target of reducing debt by a billion. If you look into FY2026, FY2027 going forward, we'll have to refinance some of those maturities. That's in excess of our debt reduction plan going forward. Yeah, we're comfortable that we will be able to refinance those maturities when they come due. With that, I say thanks for listening, and I hand over now to Gary for the outlook.
All right, thank you, Frans. Just looking forward, a lot of uncertainty in the world, certainly within South Africa and global perspective. We found the start to the year to be quite challenging just from a general trade perspective.
However, looking forward, we still remain optimistic in terms of South Africa's medium-term outlook. It's going to take a bit of time to filter through, but we remain optimistic in terms of where we see ourselves and where we see the general economic activity. The results were impacted by the MDF ramp-up and the domestic new vehicles. However, we see these both as temporary. We see those correcting, partly in H2, but really into F2026 and beyond. Our focus really looking forward is, as I said at the beginning, we finished our major investment cycle, and Frans, I think, illustrated quite well the extent of that cycle. That's now behind us, and our focus is now on extracting value from that investment. We spent our money. I think we've done it intelligently.
The projects, I think, are very good, and now it's a case of really sweating those assets and extracting the value, and that's really the focus of management now. Aligned with that is really bringing our underperforming businesses back in line with where they should be. A lot of focus remains on Unitrans. As I said, we're making good progress. We remain on our target of ZAR 700 million in the medium term. That remains a key focus, and as I said, I'm comfortable with the progress that we're making there. As Frans mentioned, we're targeting a ZAR 1 billion debt reduction by the end of F2025. We will continue with that debt reduction into F2026, and that will really position us well in terms of looking forward. It gives us more balance sheet flexibility, obviously enhances our earnings, and it just reduces our overall risk profile.
If you look at the period we've been through, it was a material investment cycle, and I think it was quite bold at the time, and it was quite a difficult environment within which to do it. It increased our risk profile. We did it out of debt, and I think that that was challenging not only for us, but for our stakeholders as well. I'd just like to thank the banks, the capital markets, our shareholders, our customers, our suppliers, and our staff for supporting us through this period. I think it's positioned KAP really well in terms of forward-looking growth. It's a really good foundation at a time when many of our competitors haven't been investing. I think we're well positioned to grow market share and to enhance our performance over the medium term.
With that, I'd like to draw our presentation to a close and take any questions that there may be.
Thank you, Gary. We have one question on the line from Etienne Roux, Truffle Asset Management. Please, can you clarify the negative impact from the new MDF line? Is it the ZAR 135 million cost plus ZAR 40 million in depreciation? Were these costs once-off in nature, and what was the EBIT performance excluding the new plant, if you can disclose?
I don't think it's really appropriate to disclose more than we had done already, just in terms of the additional costs of ZAR 135 million plus ZAR 40 million, and I think it was ZAR 85-odd million additional interest. I think it would be misleading. It is the first six months, and as I said, you start on day one with sales of nothing and production of nothing, and you slowly build it up. By nature of a project like this, you need to buy your market share. You add very aggressive pricing, margins are very low, and it's really not reflective of a forward-looking position. I think with what we've disclosed now is adequate.
Coming up to year-end, I think we'll be in a position to disclose more, and I think at that stage, we'll be able to give a more meaningful insight in terms of exactly how it transpired during the year and looking forward.
Sorry, Gary, maybe if I can add there. Etienne asked if that costs were once-off. No, they're not. The 135 is the actual production operating cost for six months, so that will continue into H2. Likewise, the depreciation is the additional depreciation on the new plant for six months, so that will also continue into H2.
Thank you, Gary and Frans. A question here from Christian Schulz from Integrity Asset Management. With regards to PG Bison's new MDF expansion, given the higher expected production volumes over the next few years, are you expecting to buy significantly more raw material from third-party sources since KAP's current timber plantations' growth and harvesting activity seem to be unable to support the higher capacity from the expansion? If so, will this process place downward pressure on margins for the division?
Yes, I think just firstly, from a raw material strategy perspective, we've never endeavored to own 100% of our raw material. We procure raw material through a combination of owned, contractual, and spot. Within the Mkhondo area, it is a very liquid timber market. We haven't had a problem in terms of procuring the necessary raw materials for that plant and at competitive prices on the basis of partly contractual, partly spot. That is not a concern for us. It hasn't placed downward pressure on margins. It is more or less in line with our current operations there, and looking forward, we expect it to continue in that vein.
Thank you, Gary. I have no further questions from the line. Obviously, happy to take questions via email or through our various interactions after the presentation. Thanks, Gary. Frans, maybe you want to close for us, Gary, please?
No, just thanks very much for your time and for your interest in KAP. Once again, thank you for your support. It's been a challenging couple of years through this investment cycle, but I'm confident that they've been the right decisions, and I believe we'll get the value out of them. It looks like we've got one more question everyone's signaling.
I do apologize. It came in at the last minute from John Williams, Rezco Asset Management. Two questions here. Please, can you update the expected utilization of the Mkhondo MDF volumes in FY2025 to 2028? What quantum of improvement do you hope to realize from the working capital attention? Maybe answer that first, and then I'll ask the rest.
Yeah, I guess the working capital one is easier in that it is a brand new plant where you're developing markets. Your production versus sales is very lumpy, so it is by definition very inefficient. To try and peg down exactly what that will mean is really premature at this stage. Overall, our working capital, bearing in mind our elevated debt levels over the last number of years, we've been extremely focused on working capital and optimizing it. That will continue. It's just really the new capacity that we need to refine as we get into a kind of a normal routine and more normalized environment. Just in terms of the capacity utilization ramp-up, as I said, we gave ourselves four years. I think at this stage, it's probably premature to give any forward-looking.
I think let us get to year-end, get one full 12 months under the belt, and that will also give us a much more meaningful forecast looking forward. I think we can disclose more meaningful information at that stage.
Okay, follow up on that. Can you remind us of the total PE capacity, polyethylene capacity, and the intended utilization outlook thereof? For Optics, the outlook for Optics, what is the risk that this continues to generate small operating profit losses?
Yeah, so polyethylene, we've got a production capacity of 165,000 tons per annum. It's fully utilized. We operated around about 65% market share in the domestic markets. Our exports were increased over the period due to a kind of unexpected weakness in the local market. Obviously, it's an expensive raw material or an expensive product to hold in stock. Rather than holding it in stock, we export to turn into cash and kind of keep our working capital going. That's our general philosophy around that business. In terms of Optics, we're making very good progress with Optics in terms of building out the product and building out the infrastructure to support sales of that product. That's now largely complete, and we have refocused that team in terms of global sales now.
We have appointed a number of senior individuals to really grow out that global footprint in terms of where we are selling in partnership with our key telematics and key video partners. I remain excited about that business. It has taken us longer than we would have liked, but I think we are now at the point where we are going to start seeing revenue starting to grow, our subscriber base starting to grow, and that business starting to turn into a nicely profitable business.
Thank you, Gary, and we really do have no further questions.
All right.
We can just close the call.
Great. Thank you very much.