Good morning, ladies and gentlemen, and welcome to KAP's FY 2023 results webcast. Thank you for joining us today. We certainly live in interesting times. Running a diversified business in the current environment in South Africa would certainly pose a challenge to any renowned business school. The challenges in the operating environment, high interest rates, volatility of our currencies, floods, the sociopolitical environment, infrastructure deterioration, and most notably, the impact of higher stages of Load Shedding during the third quarter of this financial year, have certainly tested the agility of the group and its leadership team. All these factors have contributed to the rather sudden contraction in domestic demand, experienced not only in KAP, but in many other businesses, as evidenced in recently published results.
I'm pleased to report that the group has been able to find alternative markets for its products that lend themselves to exports, which have helped to offset the softer domestic demand, to keep our plants optimally utilized and to balance inventories. KAP's focus to improve group returns accelerated in FY 2023. The restructuring and rationalization of several operations commenced during the year, and all divisions have embarked on cost-saving exercises. We expect the full benefit of these actions to materialize over the medium term. The balance sheet is also in focus, and we are committed to reducing group debt, which will be prioritized in our capital allocation decisions. Additionally, we have some exciting major projects being concluded in FY 2024, which we expect will further enhance group performance in FY 2025.
With all these developments, despite the current challenges, we are optimistic about the future of KAP, and I'll now hand you over to Gary and Frans to discuss the results and outlook in more detail. Thank you.
Thank you, Pat, for that introduction, and from my side as well, welcome to everyone. As Pat said, this is our results presentation for the year ended 30 June 2023. So, just in terms of the results, I think they need to be taken in context of a record year that we had last year. It was a post-COVID boom, where we saw some exceptional performances. And I think this result needs to be taken in that context. So just in terms of the result, there's some lowlights and some highlights, as you would always have, and I think it's fitting just to go through those in starting. So generally, we felt consumer demand lower than expected, particularly in Q3, and that impacted on our sales volumes and production volumes.
We continued to experience raw material and operating cost escalations, which impacted on margins. Globally, we saw polymer margins correcting. Now this we anticipated at the end of last year and actually guided towards it. It affected mainly our polypropylene, vertical. The other two polymers were actually relatively stable. So that resulted in a poorer performance for Safripol, and then we had a poorer performance in Unitrans as well. We saw increased interest rates, across the board, and, and that had an impact, on our, on our headline earnings, and earnings per share. And then, a result of a couple of factors, which I'll touch on, Frans will also go into some detail, we impaired the Unitrans intangibles, during the year.
I think on the highlight side, I think management and operations did a very good job in terms of quickly adjusting to penetrate export markets, to supplement, supplement domestic sales, and this enabled us to continue running our plants at full capacity. I think management also did a great job in terms of recovering cost escalations through selling price increases. It's never easy to achieve sales price increases in subdued markets, and I think management did well in recovering those, those price increases. We concluded two rationalization processes, firstly in Restonic and then in Feltex, during the year, and that was to rebase those businesses according to where we saw markets. And then we initiated a process in Unitrans, which is well advanced.
We've made good progress, and that will be concluded in the FY 2024 year. We saw good performances from PG Bison, Restonic, and Feltex, and those we will talk through a little bit further going forward in the presentation. And then also good cash generation. So if you look at these results in context, it's actually our third highest cash generation in KAP, and that was off elevated working capital levels in December, which we brought back in line to 30 June. And that was largely through exporting excess stock. Debt levels also brought back in line from an elevated half-year position, and brought back in line with our expectations in terms of where we are with our major capital projects.
Just in terms of the environment, I'm not gonna spend too much time on this slide. I think it's fairly well documented, and I think we're all feeling the effects of it. Pat also alluded to it. Generally, instability, and that's a global issue, not just in South Africa. And then generally subdued consumer spend, driven by interest rates, and we believe to a large extent, this escalated electricity disruptions, where we certainly felt the effect downstream of us, when we moved out of level four into higher levels of load shedding. We certainly saw our order books contracting as our converters and downstream customers were unable to operate at those levels. So generally, we see our business as a diversified group, that provides us with a degree of resilience through these economic cycles.
I think when you see a pervasive environment like we currently have, it starts to affect all the divisions in different ways, some more resilient than others, but all affected to different degrees. So in this context, we're really pleased with our revenue growth, revenue growing in every single division across the board. This is largely a recovery of cost escalation rather than an increase in activity. So there are areas, so PG Bison and Feltex, as an example, where we did experience some increase in activity, but generally, this increase in revenue was through price increases to recover cost escalations.
Just in terms of the operating profit, you can see there, PG Bison up, a large decrease in Safripol, which really, I, I suppose, is the, the main factor leading to the, to the KAP reduction in, in operating profit. And that is largely through three factors, which I'll explain a little bit further. Unitrans down, which I'll also explain further, and then Feltex and Restonic up, and, and a, a small decrease in Optix. So again, I think this just, just needs to be taken in the context of the environment. A record year in the prior year, a record EBITDA, and I think the EBITDA that drives this operating profit was actually the third highest EBITDA in, in KAP's recently listed history. So I think in context, still not a, a bad performance.
Just in terms of the segmental analysis, really just to illustrate, we've got three large businesses, Safripol, PG Bison and Unitrans, two smaller businesses in Feltex and Restonic, and then Optix is really a startup business for us. So, exciting business, but really small, and almost like a startup in our lives. So if we get onto the divisions, PG, very pleasing performance, supported by the competitiveness of that business, on a global basis, and the increased capacity. So revenue up 10% to ZAR 5.3 billion, operating profit just short of ZAR 1 billion, up 12%, and the margin at 17.4%, which is marginally outside our long-term guidance of 18%-20%.
So we experienced good demand in the first half, as we got into higher stages of load shedding, that softened in the third quarter. Management were very effective in ramping up exports during this period, so you'll see in the fourth bullet there, exports actually increased from 11% of our total sales volume to 18%, and that was for two reasons. Firstly, to fully utilize the increased capacity of our capacity expansion, and then also to continue running at full capacity in a subdued domestic environment. So overall, strong performance in terms of running our plants at near full capacity, selling as much domestically as we can, and exporting the balance. Our exports were at slightly lower margins, which impacted their overall margin to an extent, and that was because we exported primarily non-upgraded product, as opposed to value add.
Value add sales were also slightly lower, largely as a result of softer domestic demand. This team did very well in terms of, getting price increases into the market, really to offset, severe escalations in their primary raw material costs. And then just lastly, on PG, as you're aware, we've got a major expansion taking place in this business. It's ZAR 1.9 billion, which is in Mkhondo, previously Piet Retief, and we're just pleased to advise that that project remains on track, within budget, for commissioning in the fourth quarter of FY 2024.
If we then move on to Safripol, so as I mentioned earlier, the main impact here coming through a contraction in the polypropylene margin, really exacerbated by a much softer consumer demand towards the end of the first half, and then leading into the third quarter, of the previous financial year. Revenue, relatively stable at ZAR 10 billion, operating profit down significantly off the record performance of the prior year, so ZAR 764 million, and operating profit at 7.4%, which is within our long-term guidance range of 7%-9%. Domestic demand, as I indicated a bit earlier, weaker towards the end of the first half, particularly in the third quarter, and then recovering slightly in the fourth quarter, and that was largely related to load shedding.
Sales volumes were actually relatively stable, because we were able to switch on exports at short notice, which offset the decline in domestic sales volumes. It did, however, have a material margin impact as a result of it. So the primary drivers of this result were the increased exports. As I said, those were done at short notice, so we're actually at negative margin, and that was really to turn excess inventory into cash, and get our working capital back to normalized levels. We saw a real contraction and correction of polypropylene margins, so these were at significantly elevated levels in the prior year. In our prior year, year-end results, we actually guided towards those correcting. They did correct a little bit more than we expected, which had an impact on the results.
Then, we experienced a major plant breakdown at our Durban plant. This was disclosed in our half-year results, and the impact of that was really on lower sales, higher operating costs, and then the margin impact related to the working capital cycle in that business. There is a fairly material insurance claim outstanding on that breakdown, which we hope to finalize in the next financial year. Margins on PET and HDPE were relatively stable. Across the three polymers, two stable and one contracting, giving us a margin in line with the through-the-cycle guidance of 7%-9%.
Included in these numbers, there are some insurance, there is some insurance income related to prior periods, ZAR 216 million, and also in the prior year number, as the base for this year, there was ZAR 91 million, included in relation to the FY 2021 year. So a couple of moving parts in that result. Unitrans was a very disappointing result for us. We lost a major contract in the prior year. We had certain plans in place to try and mitigate against this, which didn't come to fruition, and we really felt the impact of that in this year. So we generally experienced subdued consumer activity, so revenue up by 3%, purely on the basis of cost recovery.
So we felt activity levels down on prior, and what you see as the revenue increase there is largely driven by the higher fuel prices, which we were able to recover from our customers. Operating profit down 33% to ZAR 385 million, and operating margin well below our expectation and longer-term guidance at 3.8%. If we look from a divisional perspective within this business, the biggest impact came in the food operations. And as I said, that was based on the termination of a major food retail contract in the prior period. We had a fairly significant termination penalty on that contract, which unfortunately, in terms of IFRS, although it was received in the current year, was actually largely recognized in the prior year.
So again, a bit of an offset in terms of the periods to which these elements relate. Secondly, our agricultural operations, we gave guidance in the prior year that we saw that recovering from a poor performance in the prior year. Unfortunately, we were again affected by severe weather, as well as the renewal of those contracts, some of those contracts on lower margins than what we had experienced previously. Just in terms of the severe weather, we do have again a fairly large insurance claim outstanding, which we hope to finalize and will come in FY 2024.
In terms of the rest of the divisions within Unitrans, the petrochemical, mining, and passenger divisions all produced a satisfactory performance, I think, under fairly trying economic conditions. So just looking forward in terms of this business, obviously, as I said, we, we have been unable to renew certain contracts at margins and returns that were acceptable to us. So on these contracts, you can always win the work on a basis that makes sense to the customer. It doesn't always make sense to us, so where we are unable to achieve the returns and the margins that we expect, we don't renew. So with that in mind, we are targeting a significant rationalization of this business. So we've already consolidated the three divisions into a single business under a single management structure.
That's resulted in the closure of underperforming operations, which actually incurred operating losses in this period of ZAR 100 million. And part of that consolidation process, we've identified cost savings of more than ZAR 100 million, which are in the process of being executed, and we will see the benefit of in the next financial year. So disappointing performance, but lots of positive work on the go in terms of getting this business back on track in terms of where we see it going forward. If we then look at Feltex, revenue up 27%, which we're very pleased with, and operating profit up more than 100%, with an operating margin coming very close to our, to our long-term guidance range.
So we saw a very good recovery in the automotive sector, so that's both in terms of assembly volumes for both local and export sales, as well as new vehicle sales, both in the LCV and SUV markets, which are our primary targets. So very good recovery in those sectors after a very difficult prior year. Very important in this business is we were able to get our price adjustments through, and those are largely to account for significant raw material cost escalations and exchange rate volatility. We were also successful in recovering insurance claims, and those were largely related to the business interruption of the KwaZulu-Natal floods, where one of our major customers was severely impacted.
Our own operations weren't badly impacted, but obviously, our downstream market and our ability to sell into that market was affected. In spite of the higher volumes and the recovery from the prior year, it was a bit of a patchy recovery with fairly inconsistent volumes. So that did create a degree of complexity, which weighed on our margins. We see that coming into the fourth quarter and moving into the new financial year as having stabilized fairly significantly, and we also see the NAAMSA forecasts as fairly positive in terms of assembly volumes going forward. Then lastly, just in terms of Restonic, we've done an enormous amount of work in this business, and we're not where we want to be yet.
Although we've seen a nice improvement in operating profit, it was actually off a lower volume of sales. What you see there in relatively flat revenue is off a lower activity base, and I again, I think this team has done well in terms of recovering their cost escalations through selling price increases, as well as through, rationalization of their product range and reengineering products to achieve certain price points of our retail customers. Profit up 17%, operating margin still below our, our long-term guidance, range at 5%. We certainly experienced, a weaker consumer environment. I think the consumer is certainly feeling the pressure of higher interest rates, as well as the impact of load shedding, which we see impacting directly on retail footfall going through, our customer base.
So our units were down 7%, and our raw material units of foam and textiles down 9% and 5% respectively, which I think is illustrative of an industry that is actually subdued. As I mentioned, selling price increases put through, and these obviously need to be taken in the context of certain tested retail price points that we need to remain within in order to maintain the volume that we're able to sell. So I think quite a challenging process that management team managed to navigate. We've done a lot of work, as I said, in terms of restructuring these operations, bringing in fresh management in a new operating environment, where we need to be a lot more agile and creative.
With that, doing a lot of work in terms of our products, our markets, the efficiencies, and really trying to now leverage the manufacturing capacity that we've put in place. So, as I mentioned, still below our expectation, but largely improved, and I see I think we'll see that improvement flowing in into the F 24 year. So with that, I'm gonna hand over to Frans, who's gonna go through the results in more detail from a financial perspective, and then I'll come back at the end just to talk through the outlook. Thank you very much.
Thank you, Gary. Yeah, definitely a challenging period that we faced, specifically in the second half of this financial year. But with that, the salient features of the results for this FY 2023 financial year, revenue up 6% to ZAR 29.7 billion. EBITDA down 11% to ZAR 3.9 billion, but like Gary has mentioned, that's still our third largest or highest EBITDA that we've achieved. Operating profit down 19% to ZAR 2.4 billion, with that operating profit margin contracting down to 8% on a consolidated basis. Headline earnings per share down 43% to ZAR 0.427, and earnings per share down 76% to ZAR 0.167, and that's largely because of the impairment of intangible assets. Cash generated from operations down 5% to ZAR 3.9 billion.
We released ZAR 2.2 billion of working capital since 31st December, when we reported our half-year results, and we've invested expansion CapEx of ZAR 1.3 billion in the current financial year. With that, our net debt increased by ZAR 568 million to ZAR 8 billion. We remained within our internal targets from a financial covenant perspective. With the expansion projects, large projects that we need to complete in FY 2024, the board has agreed or decided not to pay a dividend for the current financial year.
So if you look at the income statement on a consolidated basis, although activity and volume was down for the period, we managed to increase revenue by 6%, and that was largely due to price increases that were sufficient to offset material cost escalations. EBITDA down 11% to ZAR 3.8 billion. There's some large items which I would like to highlight. Firstly, is the insurance income. In total, it's ZAR 343 million. Gary explained all three business units separately, but most or the most part of that amount actually relates to events that took place in the prior financial year, but we successful concluded the claims, and we accounted for the income in the current financial year. Also, in the prior year, FY 2022, we accounted for ZAR 91 million in terms of Safripol ethylene price adjustment.
That actually relates to the FY 2021 financial year, that you need to take into account. And also the Unitrans termination penalty of ZAR 125 million, which is split ZAR 18 million in the current financial year and ZAR 107 million in the prior. We've impaired the Unitrans intangible assets, and that resulted in 45% down on operating profit. Net finance costs increased significantly throughout this year, with 59% increase, and that's mainly due to increase in finance costs relating to the interest to the actual interest rate increases. In total, that's earnings down 76%. If you add back the capital items to get to headline earnings, the effect is 43% down on headline earnings to ZAR 0.427.
The capital items of item number 16, so we've included a slide here just to illustrate Unitrans separately from the rest of the business. So it mainly sits in the ZAR 713 million of non-cash impairment relating to trademarks and goodwill in Unitrans, mainly driven through three factors. It's the muted outlook that we see for the South African economy in the medium term. We've seen some structural changes in the industry and also relating to the loss of major contracts. In addition to the impairments of the intangibles, through the restructuring process in Unitrans, Gary mentioned that we closed down lower profit or loss-making operations. We've impaired additional logistics assets of ZAR 74 million in the year. When you look at the tax rate on the income statement, there's three things I would like to highlight.
In the current year, the tax rate is higher than the statutory rate of 27%. The reason for that is largely the impairment of goodwill and intangible assets, which is non-tax deductible, so that increased the tax rate with 6.2%. Then in the prior year, there were two items that reduced the tax rate, and that related to the change in the corporate tax rate, which affected ZAR 91 million in the prior year, and also the government grant Section 12I in Safripol, ZAR 68 million, which was reducing the tax rate. That's why the effective tax rate from prior year to this year going from 24.6% to 38.9%. If you look at the balance sheet, property, plant, and equipment increased just under ZAR 1 billion.
It's continued investment in our operating assets and the large projects that's on the go. Intangible assets decreased due to the impairment of Unitrans intangibles. Included in the balance sheet is capital work in progress of ZAR 1.5 billion. Prior year, it was ZAR 0.8 billion. I think it's important to understand that these large projects does take more than one year to complete, so this number is growing on the balance sheet. It's not earning a return yet, but all these projects are planned for completion in the FY 2024 financial year, and then thereafter, we'll see EBITDA and the returns coming out of those projects. Working capital stable at ZAR 2.5 billion, and our net debt increased to ZAR 8 billion, in line with the completion of the capital projects.
To unpack the movement in net working capital, like I said, stable, ZAR 2.5 billion from last year to this year. Different at half year, but there was significant focus on working capital management, specifically in H2. If you look at the inventory balance, which was affected in the year through raw material and cost escalations, but successfully mitigated through higher inventory return and also, successfully, in short notice, exporting inventory in H2 to reduce our balance to a more acceptable level. It's important to understand that in our receivables, we've actually. There's ZAR 258 million included for the insurance claims that I've mentioned earlier, which we hopefully to collect in this financial year. Subsequent to year-end, we've actually collected already ZAR 77 million of that balance.
We've decreased working capital by ZAR 2.2 billion from December, and that's through inventory, receivables, and payables, and well done to management. After half year results, we got stuck in, we focused on working capital, and we released ZAR 2.2 billion. Going forward into FY 2024, there is going to be an increased focus on optimizing working capital on a monthly basis, and just to remind you that, when we get to next half-year results, that December is a seasonal higher period for us in terms of net working capital. The cash flow statement, ZAR 3.8 billion EBITDA, 11% down. Working capital stable, so it's no investment in working capital. That translates to ZAR 3.9 billion cash generated from operations.
Finance costs increased 53%, and that gave us a conversion ratio of 101%, which exceeds our internal target of 90%. So the ZAR 2.6 billion cash flow from operating activities, we've invested ZAR 2.3 billion of that, and that is to conclude the capital projects that's on the go, resulting in free cash flow before dividends increasing ZAR 286 million-ZAR 308 million. We've paid a dividend of ZAR 0.29 in the current period, in September, but that related to the earnings of the FY 2022 financial year. On the investment slide or capital expenditure slide, we include this for illustration because we have significant projects on the go.
On the left there, we have a graph over time, where we have the expansion and replacement CapEx separated, and we express that next to depreciation. To highlight is, on the right-hand side, the PG Bison MDF expansion project of ZAR 1.9 billion. That's on time, in budget, and ready or planned to be completed in June, July, 2024. The Boksburg value-add expansions, MFB and Gloss, that we finalized in the current year, so it's the information is only there for you for noting. Safripol, the HCP conversion is also on track to be completed at March 2024 in FY 2024, and that's part of our. The HCP conversion is part of our strategy to sell higher value grades.
We've completed our first PV, 10-MW PV plant at Safripol, and that was commissioned, completed and commissioned in June, and it's operating well, and there's just a small amount outstanding in the next financial year. On net debt, increased ZAR 568 million. We're providing you there with the movement. It's basically what we've settled, in terms of bonds, is what we've raised in this year. And the increase is largely driven by the investing activities of ZAR 2.3 billion and the dividend that we've paid in relation to FY 2022. With the decrease, or the improvement in working capital from December, we were also able to decrease our net debt position from half-year end results, 31 December, by ZAR 1.9 billion to year-end.
On the treasury activities, it remains our strategy to place smaller, smaller placements, more frequently, not to have lumpy, lumpy refinancing activities. In the year, we've issued bonds of ZAR 1.8 billion, and we settled bonds of ZAR 1.5 billion. In November, GCR confirmed our rating as A+. If you look at our debt serviceability ratios, with debt sitting, net debt sitting at ZAR 8 billion, that gives you a net debt EBITDA of 2.1 and an EBITDA interest cover of 4.5, and that's within our internal targets of less than 2.5 and greater than 4.5.
If you look at our maturities, on the left, left-hand side there, we've got the cash on balance sheet plus available facilities, adding up to ZAR 4.2 billion, and then a quite even maturity profile, going to FY 2029. Our intention in FY 2024 is to refinance the debt that will become due and payable. But with the completion of our major projects and our focus on reduction of debt from FY 2025, we're not going to refinance, and we'll start to settle some of those maturing debts. So, I just wanna thank again our banking partners and our debt capital markets for their support, assisting us in running and growing the business.
With that, thanks for listening to our results presentation, and I now hand over to Gary to take us through the outlook. Thank you.
Thank you, Frans, for going through that. I think if we look at the outlook, it's going to remain a pretty challenging environment, we believe. I don't think that there are any quick solutions to the energy crisis in our country, as well as other infrastructure challenges that we've got. We see interest rates staying, more or less where they are for the rest of this calendar year, and only starting to see some reprieve, coming in, in our second half or the first half of the new calendar year. So, that's kinda how we're seeing the world. So in terms of that, we don't see growth in our economy, we will seek to continue growing market share as we have in the past, and continue to grow our export market positions.
Where I think the approach will be more favorable for us on the export side is that our exports in Q3 were done at short notice. Markets weakened very quickly, and we accumulated stock very quickly. So those were done on an expedited basis at lower margins. Obviously, going forward, on a far more planned and structured basis, those exports will be placed into more lucrative markets at margins that make sense to us. We will continue to drive selling price adjustments to recover cost escalations, and this is never easy, but I think in the environment where we're living, we've got no choice other than to recover those in the marketplace. As well as obviously do our best to reduce our cost base. So that is the next target area.
Across the group, we've set internal targets over and above our budgets for cost reductions, which are fairly material. That just illustrates our absolute focus on maintaining a low-cost production and operating structure within this environment. Frans mentioned working capital, so this is obviously a focus of our business across all the divisions. However, in terms of the current environment, with the volatility that we're experiencing, it makes sense to keep those working capital levels as low as possible and obviously to optimize our debt and interest position. With that also, curtailment of non-essential capital expenditure, so we're not in a nice-to-have environment. So we've cut back a lot of CapEx projects really to concentrate on our few large projects. It's critical that we execute those in this forward-looking budget period.
All of them are on track for completion and commissioning. The big one obviously being what Frans referred to as the PG Bison MDF project, where we will start commissioning that plant in March, and it'll come in, in our budget in July, FY 2025. So, with that, we've also increased the focus on how we allocate capital. So, so with curtailment of non-essential capital expenditure and discontinuation of underperforming activities, we are disposing of low-return assets. So both of those really directed toward improving returns, improving our capital allocation, and reducing our debt levels. As mentioned, in both Frans's and my sections, we've got some fairly large insurance claims which remain outstanding.
Some of them have been finalized. It's just a case of collecting the cash, and two fairly large ones, which remain to be finalized, in the new financial year. So a lot of that really taking place on a divisional basis. From center, there's three main projects which we are driving. Firstly, the rationalization and restructuring of Unitrans. So we've certainly seen changes in the marketplace, changes in the competitive environment, and we need to adjust our business model accordingly.
So, where we've lost fairly material contracts, we've retained assets and infrastructure, really with the intention of replacing that work, and as I mentioned, where we're unable to do that at margins and returns that make sense to us, we need to take those costs and out of the system and dispose of those assets to recover the cash. So just in terms of that, we've got two rationalization projects on the go, both directed toward internal rationalization and changing the business model to be more effective and more efficient in the current environment. Obviously, as I mentioned earlier, completion of our major capital projects, MDF being the biggest. This is actually a really exciting project for us.
I think what we saw in terms of PG, exporting at short notice, still at profitable margins, really illustrates the global competitiveness of this business. And with 33% extra capacity coming online, in FY 2025, that obviously provides exciting prospects for KAP and for that business. As a board, and as management, we continuously review our various businesses, what is performing well, what is not performing well. And I think if you look at the points that I've been through above this, there's a lot going on in terms of really optimizing that portfolio of businesses, and ensuring that we are allocating capital appropriately and producing returns, according to our targets and shareholder expectations.
So looking at everything on that slide, and you distill it down, there's two real drivers that we're focusing on. One is to improve our returns, we're not happy with where our returns are, and that is a key focus area for us. And then secondly, conclusion of our major projects, getting them, revenue and earnings generating, and really using that, as a platform to start reducing debt, aggressively, from F 2025. So with that, in summary, I think Pat's conclusion, at his opening was appropriate, that we've got a lot on the go. We focused on some big-ticket key items, and I think the execution of those items, are critical for us in the F 2024 year. And with that, I think the prospects of our business, are quite favorable going forward.
So just in closing, I'd like to just thank the staff. It's always easy to announce a set of good results. And I think in an environment where you've got a tough set of results, often the hard work of our management and staff is overlooked. And I think in environments that are more challenging, although the results don't reflect it, I think management generally works a lot harder. So really, to our management, we really appreciate your efforts. A lot of management are on the call, so thank you for your efforts, and we really appreciate your dedication and commitment to the group. And then to the board, again, in times of good results, board meetings are easy.
In tough results, board meetings are challenging, and I think our board has been constructive through this last year and will continue to be going forward. And then just to customers and suppliers, obviously, without them, we don't have a business, and we really thank them for their support. So with that, we've concluded our side of the presentation. We have dedicated some time for questions and answers, and so in the top left, I think, of your screen is a Questions tab. So we encourage you to log on to that and ask your questions. So there is a little bit of a delay in terms of how it comes through, so I'm not sure, Christina, if she's got questions yet, but as soon as they start coming through, we'll get onto the questions.
Thank you, Gary, and thank you to the audience for dialing in. Our first question is from Desmond Mahube , from Ashburton Investments. "The contract that you lost, how much did it contribute to revenue of the business unit on an annual basis? And what lessons did you learn to mitigate the loss of other contracts in this division?
Thanks, Desmond. So it was roughly ZAR 1 billion revenue. And it was a, I mean, it was a very challenging contract initially. Management did a fantastic job in terms of turning it around into a very lucrative contract for us, so it was actually one of our highest return contracts. Going into the re-tender of that contract, we tendered less than half of the profitability, and were unsuccessful, and I think that speaks to the discipline of the group in terms of capital allocation. It would have been a significant capital expenditure for us, which we weren't prepared to continue with, without earning the right returns.
I think just in terms of the lessons learned is to constantly reassess contracts and mitigate against potential loss through returns being too rich. And then secondly, when we do lose contracts, to be a lot more disciplined in terms of rationalizing the relevant operations and disposing of those assets immediately, and then rebasing the business according to the new scale of the business. So we were perhaps a little bit optimistic in terms of redeploying those assets into other work, which we were unsuccessful with doing.
Thank you, Gary. Another question from Desmond: "How much of the inflationary increases were you able to pass on to your clients during the year?
Desmond, I think from a raw material cost perspective, we were successful. In terms of operating costs, so we operate in a fairly high cost environment, where some of those costs are out of your control, like utility costs, as an example, or distribution costs. So in terms of the operating costs, we were less successful, so we would have got a proportion of it, but you would have seen the impact of that in our margins, where you would have seen our margins deteriorating from previous periods.
Thanks, Gary. A question here from Thando Mtshali , from Aluwani Capital. There's a few. I'll just group them. Firstly, "Should investors expect further impairments in Safripol?
Oh, so we do impairment testing every year. It's a detailed process. It's a key audit matter every year for the external auditors, and for our audit and risk committee. So that's a detailed process that is performed every year according to both past and forward-looking performance. So at this stage, in terms of the impairment testing that we did at this year-end, there was not a need to impair further. Obviously, that process will be done on all of our intangibles at the next year-end again, or to the extent that there are any impairment triggers or signals that indicate that we should do it sooner. So, I think it's part of normal process.
Okay. Second question is, are you able to provide some guidance of where working capital and cash conversion will settle in first half 2024, Frans?
Yeah, I think, like I said in my presentation, so cash conversion, the way that ratio works is the conversion of the net working capital on EBITDA. So one thing you need to take into account at half year numbers is that you only sit with half a year's EBITDA, but you sit with all the working capital on your balance sheet. So a relative small movement in the balance sheet does impact the ratio. But saying that, it is our busy period leading up now into October, November, so we do see elevated working capital. And then two of our larger businesses, PG Bison and Safripol, we run the plants continuous throughout the year, and December is not a good sales month. So you normally end up with stock in December that you then sell in the second half.
I think that's what I can say. Christina, I'm not going to give any specific forecast or projection.
Uh, thank-
Christina, just to add to that. So what we experienced in our previous financial year was a rapid weakening of markets, domestic markets in November, December. And as Frans said, generally, the market starts to shut down from mid-December. So you end up with our production running and accumulating stock, which is not sold until January. That, combined with weakening markets, led to even more elevated stocks. So that shouldn't repeat. So we don't see working capital remaining at the levels that it was in December. I'll get my years right, December 2022. It should be lower in December 2023, but it remains elevated relative to June.
Thank you, Gary and Frans. Another question from Thando: "With the volatility in earnings, will you look to letting some maturities roll off?
Yeah. So, on that, on that debt maturity slide, so our plan for FY 2024 is to refinance all the maturities, and that is just the nature of where we are in terms of the investment cycle, and we need to conclude those major projects, get them up and running, get them to generate EBITDA and returns. Going into FY 2025, FY 2026, we will focus on actively reducing debt. So the net effect of that will be that we will pay off some of those maturities, and we'll only refinance a portion of that.
Okay. Thank you, Frans. A couple of questions on the MDF expansion project. The first one from Toko Makuna from Oystercatcher Investments: "Will the Mkhondo expansion result in production cost savings and improved margins, or will it only be a volume effect coming through?
Yeah. So initially, you will get volume coming through at current margins. Because that scale of capacity, you can't bring all on day one. So in terms of our feasibility, we've provided for a ramp-up over a three or four-year period. So with that, you will see increasing revenue, with margins should remain relatively stable. But as we start to get into higher levels of utilization, we'll then start to see the real cost benefits and efficiency benefits of that coming through.
Having said that, a large part of our feasibility in terms of running this or building this plant is on the basis that you will have a 1,000 cubic meter per day particleboard line, a 1,000 cubic meter per day MDF line, a paper treatment facility, and a resin plant, all on the same site, all with one site services overhead. So overall, once that site is running at near full capacity, it will be by far the lowest cost producer in the country, and it will be a globally competitive plant. So over time, you will see margin improvement.
Okay. Thank you, Gary. So a bit of a technical question here from Ricardo Khumalo on the MDF expansion project: "Are we targeting the export markets with differentiated resin system?
Yeah. So, so our product is falls within international specifications. So, so everything we currently make falls within international specifications. There is one element where, where European standards require certain emissions, so it's, it's E1, E2, E3. All of our plants are able to produce E1 product as we sit today, and we will be able to do that going forward. Obviously, newer technology allows you to do that more efficiently, so, so that we see as an opportunity. But it, it's something that we can do as, as we, as we sit today, and we do it already with, with some of our exports.
Thanks, Gary. I've got a question here on debt from Rowan Goeller at Chronux Research . Could you give some guidance with regards to the debt levels that you are targeting?
Yeah, Rowan, thanks for the question. So, so our, our real focus for F 24, as I said, is to conclude existing projects. Once that's concluded, we don't have any major projects outstanding. We, we do have lots of opportunities for energy, both in terms of solar as well as alternative generation, gas generators, et cetera. But that doesn't come in any major chunks. It, it would, it would be spread over an extended period. Likewise, in terms of our logistics business, we don't have any major contracts out there, and as I mentioned earlier, we are applying far stricter capital allocation metrics to that business.
We've got no major new model introductions on the Feltex Automotive business, and in terms of the Restonic business, we have really constrained CapEx so that they sweat the existing assets. So no major projects. So we see in FY 2025 degearing starting to happen. We've got some internal targets, which are fairly significant. I'm not comfortable right now to provide exact numbers, but it is a material focus of management and the board, starting in FY 2025 and really continuing beyond that.
Thank you, Gary. A question here from Charl de Villiers from Ashburton, related to capital allocation, and the comments made during the presentation of improving returns. A question on Unitrans, given its proportion of NAV on the balance sheet, how much of Unitrans' asset-based post and payments is not earning a return in excess of our hurdle rates? And is there a viable or rational path to rehabilitating underperforming logistics assets, given the structural changes in the SA logistics market? I hope I've conveyed that correctly.
Yeah. Thanks, Charl. Listen, I don't think it's a coincidence or an accident that you've seen many listed organizations exit the logistics space. So it is a tough marketplace that is impacted by deteriorating infrastructure, deteriorating road conditions, compliance levels, and enforcement. So it is a tough environment. I think the model that Unitrans has enjoyed previously of long-term fixed and variable contracts with a degree of volume protection those are more difficult to come by. So we're operating in a different environment, and with that, we need to change our thinking around how we run that business, how we allocate capital to it. And that's really part of the deliberations of management within that business and the board.
And it's something that we are addressing with urgency. So, it's not something that we are sitting on our hands and waiting. I think you've seen that through the businesses that we've closed, the non-renewal of contracts at rates that were suboptimal for us, as well as the significant rationalization that's taking place. So that is on the go. And I think that's an important process to get through before we decide any further.
Thank you, Gary. A question from Talia Ginsberg from Matamba Wealth. Do you have an outlook for the polymers market, perhaps?
Sure, I do. But it's unfortunately fairly variable. So there's a lot going on in the world in terms of political and global trade which all has an impact. So unfortunately, it is a variable forecast. I think what we are doing internally is concentrating acutely on our markets where we sell our products, ensuring that we are optimizing margins and prices in the markets that we operate, and designing our product range to be longer duration, multiple use rather than single use, lower margin products which are more open and exposed to imports. At the same time, really focusing on competitiveness internally.
So we do benchmark ourselves globally, in terms of our competitiveness levels, and I think those are the important things to focus on, is: are we procuring correctly? Are we operating correctly? Are we producing the right products, and are we selling them into the right markets? Those are the things that we can influence, and outside of that, there will be variability and cycles within which we have to operate.
Thank you, Gary. Another question from Thando : Load Shedding had a significant impact on your operations. Please provide some update on some of the initiatives and related costs.
Yeah, Thando , generally, we are, we've been able to operate fairly effectively through load shedding. Getting into the depths of stage six and beyond, it becomes a challenge for us. Our costs go up, and the volatility becomes more challenging to deal with. But up until stage six, we can still operate. Our challenges are actually downstream, and that is largely the converter market of PG Bison and Safripol, where our converter's ability to operate is worse than ours. And then on the Restonic business, where you've got direct impact on your retail sell-through, especially in smaller towns where they experience far worse load shedding than you would in the large metros.
So, what we have seen is that, South Africa, as we know, is a very resilient people. And what we have seen is that as we kinda move to these more challenging environments, it takes a little bit of time, but our customers certainly get themselves organized and are able to make plans. So we're hopeful that should we return to a stage six kind of environment, I think there will be better preparation and better plans in place, both in terms of our own business and downstream from us. So it remains a challenge.
We see it also as an opportunity, firstly, in terms of diversifying our supplier, our customer base into export markets, which, if we do on a consistent long-term basis, provides good risk mitigation and further resilience to our business. Then secondly, as an investment opportunity in terms of energy generation. So as Frans mentioned, we've commissioned our first solar plant, a 10-megawatt plant. And then, we've got two further plants which are in progress in this year, which will be commissioned within FY 2024. And a number of projects beyond that, which we will choose whether we pursue or not, according to the outlook during FY 2024.
Thank you, Gary. And then a question from Rydal Rainer. I think we've touched on this during the presentation, but if you can just expand further. With the local and global economic factors affecting the bottom line, are there any plans or launching of strategic initiatives or project to mitigate these factors in the new business year?
On Optix? Yeah, so Optix, as I said, it's a small business in our lives. We see lots of growth opportunity. It's really a kind of platform-type business with once you've got the architecture in place, you can actually scale it quite significantly. We've done that quite effectively in terms of operating in the various territories where we do operate. And we operate in more than 40 countries currently. So I guess part of the risk mitigation in terms of the factors that affected SA is to grow our export or non-SA business. That's a natural risk mitigation as part of our growth plan. In terms of our domestic business, the need in South Africa is enormous. As I mentioned, deteriorating road conditions, deteriorating levels of compliance and enforcement.
It's really a critical element in terms of road safety and efficiency in the South African roads and logistics environment. So with that, we have put certain measures in place in terms of mitigating against exchange rate volatility, both in terms of procuring new sales as well as the ongoing subscriptions that we collect in terms of the services that we provide.
Thank you, Gary. And then another question from Toko, from Oystercatcher: "How exposed is the chemicals business to Sasol?
We are exposed. We buy ethylene and propylene from Sasol, both key raw materials for us. There is a degree of mitigation in terms of the sites that we buy from and the contractual nature of those suppliers. So they are a supplier of ethylene, propylene, and a competitor on polypropylene.
We have no further questions. Thank you, Gary, Frans, and Pat, for the presentation, and thank you to the audience for dialing in. You're welcome to reach out with further questions after the presentation. Gary, would you like to conclude, please?
Thanks, Christina, and thanks for your attention and for your time in terms of listening to the presentation. As I said, never easy presenting tough results, but I can assure you, we do take them very seriously, and we do have very clear, tangible plans in place to remedy the underperforming operations, as well as to improve and drive the performance of the performing operations. So thank you very much for your time and attendance.