Ready to go? Everybody online? Excellent. Thank you everybody for joining the interim results presentation of Metair. Welcome everybody in the room and everybody online. It's an interesting presentation, but obviously the outlook is quite good for the company regardless of what's happened in the last six months, which we're very proud of. I think as incoming CEO, I thought, let me just give a state of the, let's call it not state of the nation, but state of Metair address to shareholders rather than just top of mind issues and what we're dealing with, et cetera. I think in the short term, just to confirm our vision, I suppose, is we want to become, and we are, a leading automotive component and energy storage solution partner to all of our customers in the market. Right? That is fundamental to our success.
Secondly, we have, I'll cover that in some of the slides to come, we've got significant change in the automotive industry. It's going to hit us next two years, three years, leading up to 2030, et cetera. I'm very excited to lead very capable team. At this point in time, we're strengthening the team. I'll talk to that as well at this point, and I think it's going to give us great opportunity into the future as well. My focus areas at the moment, short term and long term. Probably shorter term, operational efficiency, and we'll talk to Hesto specifically, separately, is to ensure that we've got the stability, efficiency, competitiveness, which is always front and foremost of all of our discussions with customers. Also the management bandwidth, capacity, capability, et cetera, to deliver on what's required over the next few years. Secondly, automotive components.
In South Africa, there's been a lot of announcement recently about new entrants into the market, et cetera. It's all very positive, especially Stellantis announcing their potential ZAR 38 billion investment into South Africa, Coega, with 50,000 vehicles potentially going to 90,000 vehicles. Light commercial vehicle, obviously, we are very well-placed to participate in that. It's kind of hot off the press, so it's not incorporated in our presentation, but certainly very positive.
Sorry, I have to switch.
Do I take this off or no? Leave it. Okay.
Hello.
Okay. That's very good. I think front and foremost is preparing our group companies for the future. We do anticipate significant change in technology, which I'll cover in the next couple of slides. As well as combined with these technology changes, is obviously project management, project delivery, preparation for projects, et cetera, and the complexities that go along with that. Some of those we'll discuss specifically from a Hesto perspective, but obviously, it's across the group. Energy storage we'll cover in detail, but there are significant opportunities. From an export point of view, we have lost, I suppose I'm leading with that message. We have lost Russia because of sanctions, and the U.S. market because of, let's call it geopolitical issues. The main focus will be to recover export volumes in that region, right-sizing the business, et cetera.
Longer term, maybe short term, is looking at the portfolio companies that we have within Metair. We've got 15 investee companies, and it's to ensure that we enhance some of their performances. There may be some rationalizing of portfolio companies, but obviously, in our minds is de-risk of the portfolio. When we talk de-risk, from a Metair perspective, we don't like to deal with things that we can't manage. We can't control. Obviously something like Turkey, something like Romania, Russia, Ukraine, et cetera, those are things that we don't like, we can't control. Obviously, from a portfolio assessment, we are actively looking at that as we've communicated previously to the market. Then lastly, which is probably the most important thing ultimately, is financial performance.
Regardless of the last six months, and some of the issues that we've had, the major focus is on financial profitability, cash generation, sustainability of all of our companies in line with our customer requirements. Obviously, we've had significant investment, aligned with Ford and the Ford business, and we need to deliver on the expectations that we have in ourselves and obviously, from shareholders and funders as a result. We very confident that we can still deliver on that, regardless of some of the issues that we'll discuss on the six months. Just in terms of business stability, operational performance, and competitiveness, we've actively looked to broaden the leadership within Metair, from an operational perspective, from a manufacturing perspective, from an insight, et cetera, perspective. We have brought Wolf in. Wolf at the top there.
He's Metair Automotive Operations Executive, and now he's fully full-time assigned to Hesto, to bring Hesto to the level that it needs to be in terms of efficiency, profitability, cash generation, et cetera. Don't ask him any questions because Johan is brand new. As a Chief Operating Officer appointment, it's on a bringing in exactly. Johan's been in the automotive industry for 40 plus years with BMW, so it gives us a significant OEM perspective on the business. Certainly gives us a lot of insight into the other side of the table, as component manufacturers, we're obviously always facing off with the OEMs. We're excited to have Johan. Main purpose will be obviously to bed down, the step change, new customer project, which is Ford, and mainly Hesto. We've had a lot of comments from shareholders around Hesto for the first six months.
We'll go through it in the outlook. Certainly the outlook looks much more promising than what we've had over the first six months. We need to reach our targeted efficiencies, quality and output. On the output perspective, I can say that we're meeting all of our customer requirements 100%. We're not letting the customer down at all. Obviously we need to serve them at a level which gives us profitability and cash generation, et cetera. As such, the underlying performance of the business remains really robust. Exception of Hesto, but Hesto we'll deal with in the outlook. That's probably the most specific headwind that we faced within the group, and Anesh will cover that. At the moment, my focus will be on three companies, and Hesto, you could probably mention Ford as such. We've got four companies that are heavily invested in Ford.
Three of those companies are doing really well and meeting their efficiencies, meeting their targets, meeting their volumes as expected, according to business plan, et cetera. Hesto is the one that we are, for lack of a better word, fixing at the moment. There are significant complexities. From the point that we were awarded the business, design changes, complexity changes over the six months have been absolutely extreme, enormous, unlike anything that we've ever seen before. There's a huge commitment, not just from ourselves, but obviously more importantly, the customer and our technical partner, and I'll cover that again later, to ensure that Hesto meets its profitability targets, cash generation, business case, et cetera. For me, it's really a six months of really difficult performance meeting customer requirements, but forward-looking, very positive. That's very important.
Mutlu, as I mentioned, we've seen reduced export demand, Russia and U.S., we are looking at rightsizing that business commensurate with offtake or sales volumes. From a Russia perspective, it's obviously a sanctioned product at the moment, we've got no chance to sell anything into Russia. Then into the U.S., I suppose you could say it's a little bit more geopolitical in nature, but there's still opportunity in the U.S., but for the time being, it's on hold at the moment. The second half of the year will be a little bit challenging, hence rightsizing of the business becomes very important. We're looking to expand export markets, new markets outside of the U.S. and Russia. Team's doing well. We've allocated a lot of time and attention, and resources in developing those markets. We're already seeing some good traction.
Yes, it's not going to compensate us for the loss of 1.1 or 1.4 million batteries, but we're making good progress on that, so that's good. Lastly, in the Turkish environment, interest rates have hit 50%, basically. Every TRY that you invest in working capital or capital or otherwise is 50% interest. Major focus, I'll cover that in the outlook again, is obviously reducing working capital, investment, overall exposure to banks, et cetera, and looking at alternatives to reduce that exposure. Obviously, in time, that will reduce. It's not going to stay at 50% forever, but for the time being, it's 50%, and it's really difficult to deal with. Rombat in Romania has been impacted significantly by Russia-Ukraine war. We've seen that in terms of energy cost, we've seen that in terms of aftermarket volumes, et cetera.
Rombat was slightly loss-making in the first half of the year. They've made good progress. New customers, new export contracts concluded. We expect them to turn around second half of the year. I'll cover that in the outlook. That's obviously good. From an ESG perspective, there's some significant solar and green energy that we're investing in Romania at the moment. From a strategy point of view and critical success factors, automotive components, which is mainly South African as you know, our Metair companies are very well-placed to meet current requirements, and as we do. Also more importantly, looking into the future, very well-placed to deal with changing technology, and our parts remain relevant. Absolutely relevant and sustainable.
We do expect a progressive change in technology leading up to 2030, especially given the export side of the business, because 70% of what we produce in South Africa is exported. We will see definitely a combination of internal combustion, hybrid, plug-in hybrid, battery, electric, and hydrogen fuel cell production in South Africa. There's a massive kind of fragmentation of technology, and exactly where they will land, unfortunately, OEMs don't even know exactly where they're going to land. Our position at this point in time is reflecting on the products that we have, the relevance of our products, and the relevance in serving in those technology requirements. On that basis, we are comfortable that we can continue to deliver, and extend our market share. Our preparation for the change remains key, in line with our customer demands.
We also need to think about solar and green energy transformation. Going up to 2030, exporting into Europe, it's going to be absolutely a necessity for us to be green in terms of how we operate, how we manufacture, et cetera. That's something that's obviously not immediate, but certainly a transition that we see over the next few years. Ultimately, a lot of where this lands in terms of technology will be informed by policy of government, which we expect to be released sometime in October. Certainly, I think on the back of the Stellantis announcement yesterday, I think it's a good sign in terms of where the policy's going to go in terms of supporting new energy vehicle initiatives from not only an OEM perspective, but also from a component manufacturing perspective. Energy storage-wise, OEM and aftermarket remains really strong.
We are prioritizing the replacement of export business, Russia and U.S., which was significant. That's obviously taking a lot of our attention. We still believe that we are placed to deliver on and to enhance based on requirements from customers, technology, lithium-ion, et cetera, trading, not producing, but trading through our existing sales channels. Internal combustion starter battery demand remains really strong in aftermarket and OEM at this point in time. In future, over the next four, five, six years, we do expect OEMs will require a different battery technology. Not in terms of powertrain, but certainly in terms of auxiliary batteries. We may move from a 12 volt, which is a big battery, to lithium-ion, which is a smaller battery, or something else. Again, we are well-placed to either produce or trade that in the future.
I think very important is lithium-ion. We do have a lithium-ion line in Romania which we invested in, I think, five years ago. At this point in time, our view is that further production or further investment in lithium is just too expensive. There's basically five major licensors globally, producers globally. OEMs will partner with them. The chemistry changes daily and is very specific to each OEM. As such, I think apart from storage, where we do have an opportunity, we've taken the view that probably best to exit the lithium line in Romania and we'll engage in a process to sell the line that's currently in Romania. Obviously, potential value unlock, or de-risking options in terms of Romania, Turkey, still front of mind in our thinking. That has not changed.
Just lastly, before I hand over to Anesh, just a quick reflection on the result for the first six months is, operating environment has been challenging. We have properly launched the largest single project that we've ever launched across four companies in our subsidiaries. We've had the impact of Russia, a loss of U.S. sales, which has added to the short-term strain. We're obviously very much focused on restoring the export volumes, and new markets, et cetera. Excluding Hesto, and Hesto we'll spend a bit of time on, Anesh will spend a bit of time on I'm sure. Strong operating profit and EBITDA growth in the business. As Ford coming online, less of an impact of hyperinflation, as we mentioned, I think at the full year results.
Obviously, given the investment cycle, we are, from an headline earnings per share impacted by the high borrowing cost, especially in Turkey, given where we are at the moment. Automotive components, which is mainly South Africa. Hesto is the main focus. Upfront inefficiencies, design changes, off-take means volume changes, has been quite significant. We see that normalizing, and we have the, not interesting, it was not interesting at all. We did have a facelift three months after launch. We had to deal with the facelift three months after launch, which obviously created a lot of strain in the system. We didn't let the customer down at all. Secondly, as I mentioned, we're strengthening the team to deal with all of these complexities and changes.
Our technical partners are very involved, especially on the Hesto front, to ensure that we meet the efficiency and the targeted efficiency, et cetera, that we planned, and that we can ultimately deliver the business plan that we approved. We're seeing daily improvements in efficiency within Hesto, which is a really good outcome. We believe strongly that Hesto will be profitable regardless of what's happened the last six months, once-off cost, Anesh will go through that. Once-off cost or inefficiencies, et cetera. We strongly believe Hesto will be profitable for the second half of 2023. That is obviously with the support of our technical partners as well as the customer. Not just ourselves, but the customer obviously understands design change and et cetera, what we're dealing with. As I mentioned, other group entities within the new Ford program continue to do really well.
It's isolated to Hesto at this point in time. Where is Stana? Where is Sedation? Where are you? We've got fantastic and other funders. Who else is Sorry, you're all waving at me. We've got exceptional support from all of our funders, and I think they've obviously got the benefit of the forward-looking business cases, which we can't share with shareholders. On the back of that and all of the activities that's ongoing, obviously they are still very, very supportive of the business. Anesh will go through detail on that. Therefore, we do expect a really good recovery in automotive components in the second half of this year. From an energy storage perspective, export remains the major focus of replacing potential loss of 1.1 million batteries that are at risk. The team's very focused on that at the moment.
That involves new markets, brands, product design, et cetera. The progress on that is quite good. Right sizing will be very important. We've initiated it. It's on track. Especially from a Mutlu perspective, regardless of loss of sales, we do obviously manage the business in line with the expectation. Then obviously the options to mitigate high borrowing cost in Turkey will remain top of mind. From a First Battery perspective, business has rebranded to align across all of its segments. Automotive, aftermarket, industrial, et cetera, including storage and solar. We do see good opportunity apart from just initial sales, but also potential replacement market for lithium is starting to come through. I think some of the systems that have been sold into the market by some of the, well, let me not say too much.
There are some substandard systems, batteries, technologies that are starting to fail. Obviously we as a very responsible in terms of quality, et cetera, maybe we've been delayed a little bit, but I think we obviously back our product 100% in terms of warranty and capability, et cetera. We do see that as an opportunity as well. In the aftermarket, we've grown market share across most of our territories, so that's really good. Then Rombat impacted by inflation, high inflation, energy cost, which is improving. The loss of U.S. sales, and obviously continued impact of Russia and Ukraine complicating our environment. I'll stop there. Now I've got the pointer. Thanks.
Hello, can you hear me? Thanks, Stuart. Good afternoon to everyone. I think let me take you through the financial section of our presentation. A difficult and challenging six months, but I think, just to reconfirm what Stuart has been saying, positive for us going forward, especially locally from an OEM perspective. We've seen good growth, and you can see that in our turnover line for the year from a group perspective, 31% up from the previous year. A lot of that is generated obviously from the new sales we've been generating from our key customer, Ford, and also the return to production of Toyota post-floods. The KZN impact has really driven that revenue, and top-line growth for us, and I think that's indicative of where we're going in the industry and in the country going forward.
Hesto, as you might know, we don't consolidate into the group numbers. I'll get into those details later. Most of these numbers would exclude Hesto from a group point of view. I'll take you through a bridge in terms of how we overlay Hesto into the operations. Hesto had good, strong turnover growth, but was impacted by significant complexities into the launch of the new Ford model. As we mentioned, there was also a facelift shortly post mass production in December. The complexity is largely around mixed variations, around the ordering of parts, the long lead times that we had, and the variability in what we call also daily volume pull from Ford. Subsequently, volumes have stabilized. We're reaching the peak of 720, as Ford mentioned, in their capacitized plant volumes.
Since those impacts in Q2 of this year, operations have improved greatly. From an EBITDA perspective, we've increased from ZAR 529, 76% increase in operating profit or PBIT, in short, increased 124% to ZAR 324 million. On a normalized basis, it's just over half a billion. A lot of that growth was generated out of Mutlu. As you know, we do report Mutlu on a hyperinflation basis. That means we do restate numbers out of Mutlu, and we're happy that we actually incurred a loss of ZAR 44 million last year, but we've improved to a profit of over ZAR 160 million for energy components and largely driven out of Mutlu. From a net debt perspective, it increased to ZAR 3.2 billion from the December position of ZAR 2.6 billion. As we said, largely driven by the peak debt levels because of investments that we carry at the moment for our new model.
Also largely, a lot of working capital. The working capital has increased by around ZAR 500 million, split evenly across the verticals, but largely in our auto components vertical, we are carrying a lot of safety stock at the moment because of the supply chain disruptions that we had in the past. We're looking at that unwinding into the second half and be more cash generative from a working capital point of view. Cash generated from operations before working capital, positive, nearly half a billion. We did, as I said, about ZAR 500 million worth of working capital. Really from operational point of view, still negative. Free cash flow utilized, ZAR 384. A slight improvement from previous year due to the auto component recovery from the floods in the previous comparative.
Headline earnings per share, ZAR 0.41, 9% down from the previous comparative of ZAR 0.45 per share. As we mentioned before, the high interest rates and borrowing costs did hamper after-tax profits, and largely a lot of that interest cost. Interest costs did move up by 125% to ZAR 280 million. A large part of that is generated out of Turkey with the high interest rates and borrowing costs at the moment. From a debt financing point of view, and from a Hesto point of view, we have received the support of our funders. Covenant condonement has been issued to us for the June position subsequent to year-end, and we are working on waivers on the forward position at least well into next year. From a funding point of view, in general, we have received waivers in terms of the Hesto debt.
From the Metair CTA point of view, yes, we are working on that. We do have over one funder that has allowed us relaxation in terms going forward. I will get into that detail, and we are working with our other two funders to get that over the line. Negotiations or discussions are being positive going forward. From an overall operational point of view, I think from net scrap, we recycle a lot of debt in the group, nearly 30,000 tons for the six months. From an ESG or lost time injury frequency rate, we have improved to 0.16 compared to 0.2 in the previous period, so that is well done to the operational teams. From a supply chain perspective, yes, we did carry a lot of stock.
We will unwind this into the second half, and we will unwind also a lot of working capital in the energy business as we lead up to the busy or peak season, as we have always said, within our operations. Key customers or top two customers, Toyota and Ford, their volumes half on half have been up 37%. That is strong growth in our auto business. To go through the income statement, and largely this group income statement, ZAR 7.6 billion turnover, operating profit of ZAR 324 million, up 124%. It has really increased quite significantly to ZAR 280 million from a comparative of ZAR 125 million. Associates line. The associates profit that we normally take into our P&L was a slight loss of ZAR 10 million. Importantly, this number does not include the results out of Hesto.
Hesto did incur an operating loss of ZAR 711 million, an after-tax loss of ZAR 417 million, largely because of the complexities in the first half. Because we account for Hesto as an associate, and in terms of the shareholders' agreement and accounting rules, once you have hit zero in terms of your investment write-off, you are not required to consolidate those losses into your balance sheet or income statement. Effectively, where we are for the first six months, and in terms of the accounting standards, we have reported a HEPS of 41%, but it largely excludes Hesto. We will accrue or start accruing for profits from Hesto from the point in time when we actually make up profits to cover those losses. We estimate that to be around in 2025. Largely, from an overall income statement perspective, profit after tax of ZAR 108 million.
We've got a financial or a hyperinflation gain of ZAR 180 million. For Metair, this period, the virality of hyperinflation for the first six months was quite less severe than we had in the previous period. We do see some upward or challenging conditions in the next six months, which we'll navigate through for the rest of the year. Metair's effective tax rate is 49%, and largely, there's quite high tax rates in Turkey at the moment. The CIT rates have increased quite a bit. There was a special earthquake tax as well in the country following the earthquakes around January or February. I've explained the Hesto position in this ZAR 427 million. That's not included in this income statement numbers. From another income point of view, just to highlight, if you remember, we did accrue for some of those flood claims from our stoppage at our major customer.
Other income has declined from ZAR 350 million to ZAR 120 million, largely because of those flood claims. From a balance sheet point of view and a debt perspective, non-current assets have increased quite a bit, and that's because of the hyperinflation impact. The strong asset base that we have in Turkey protects us against hyperinflation, so that's quite a valuable asset that we have at the moment. The group funding, technically at June, we had to classify as current, although we have implemented corrective measures in terms of the covenant breach going forward, and that will be remedied. We had to classify that as current debt at the June position. We are actively engaging our funders to extend maturities going forward. ROIC, as reported, 5%. That's because of the high investments that we've made into the operations. It's the first year of full production.
We were hoping to see returns, and we will see returns in the next year. On a normalized basis, ROIC is 11.77%. If I just unpack working capital just a bit for us. Largely, we do see the increase in turnover, so there we had to support that from a working capital point of view. We had stronger sales in auto components. Also we had complexity in terms of daily volume offtake and as well as material escalations in terms of costs. Other increases we build up for the batches is in H2. Lead prices in local terms have been much higher. The customer mix profile, especially from Mutlu and losing the Russian and U.S. sales, has affected the debtors book a bit because normally on exports, we do recover a lot of that cash upfront.
Temporarily, we've lost that hedge in terms of the debtors book. We do have higher safety stock levels in our auto components business, which will unwind into the second half. From a debt perspective, just to unpack that a bit more simply and what we carry at the group, we had ZAR 2.6 billion at December year-end, ZAR 1.2 billion belonging to Hesto that we bring onto the balance sheet. We did raise a bit of working capital at Mutlu. Minor increases in the rest of the business, and we've raised additional funding at Hesto, largely because of the financing we needed to fund the ramp-up. At June 2023 position, net debt, if you include Hesto, ZAR 5 billion, and we're looking to unwind that to just below ZAR 5 billion. Especially from a group perspective, we will move from ZAR 3.2 billion to ZAR 2.8 billion once we unwind some of that working capital level.
As we have mentioned, interest cost is quite high. We would see short-term high interest costs in the next six months. The Turkish market rates now is probably between 45%-55%. We will see a high interest cost in the next six months, and we'll unwind from next year as we improve the capital structure and unwind working capital from a Mutlu perspective. From a net debt perspective and especially funders' covenants, just to go through it quickly. Where we are, we did agree with one of our main funders to increase the leverage ratios. We do move from a dividend and interest ratio from three to not more than two times at June, from not more than 2.5 times at December, to not more than four times in June. Another priority debt covenant not more than one time, so not more than two times. Sorry, at June 2023.
The funding is high. It is at peak debt levels of ZAR 5.2 billion, but we will look to reduce that by year-end to just below ZAR 5 billion. While we do that, we will look at a group refi in terms of our capital structure, debt structure, hopefully by Q2 2024. In terms of normalizing the result, and once we bring in Hesto, it's a high-level analysis. It's on the base-to-base calculation that we had in the previous year. If we bring in, and if we just talk about EBITDA from a first six months perspective, once we bring in Hesto's losses, it's an EBITDA of ZAR 88 million.
We did incur unusual costs, as I've mentioned, and we've quantified that at the Metair level, ZAR 369 million. We've get to a normalized EBITDA for the first six months of ZAR 600 million, compared to ZAR 743 million in the previous period. From an earnings adjustments point of view, it's quite a lot of analysis we did, which we can take back. This is just to put it from a group perspective, energy and auto components perspective. What I'd like to highlight here is that once we exclude Hesto, the auto business produced a profit of ZAR 263 million, which is largely comparable to the previous position. From an energy perspective, once we take out the impact of hyperinflation, we reach a profit of about ZAR 291 million.
Hyperinflation is for notes, I just want to highlight the drop in hyperinflation or CPI rates in the six months to this year to 20%, which had a less impact on the numbers we produce out of Mutlu. From an IFRS reported point of view, I did touch on that. Group profit, operating profit, ZAR 324 million. From an operating profit analysis position, largely we can see if I do a quick shortcut bridge from H1, ZAR 144 million, ZAR 324 million, good profitability coming out of Mutlu. From a normalized perspective, energy storage comparable at ZAR 291 million. A large part of this was Romania. We did incur an ZAR 11 million loss that we're hoping to claw back in the second half because Rombat is quite a second half business. From an auto components, we improved to the ZAR 45 million operating profit once we add back all of those unusual costs.
From an automotive components volume point of view, we can see our top three customers cumulatively up 21% from the previous period, really driving the growth in revenue to 147%. From a PBIT perspective, unfortunately because of Hesto, we had ZAR 448 million operating loss. From a group perspective, remember it's excluded because of the underlying associate accounting. From an energy storage perspective, volumes impacted by the loss of exports really affecting Mutlu, we're down to 3.6 million units from a Turkey perspective. A bit of softer volumes out of Romania, which we will recover in the second half. A good performance top line from South Africa, that's FB perspective, 10% up on auto. We did do a strategic initiative to grow back sales, which didn't translate fully into operating profit but will in the second half.
Analysis, segment analysis, really, this is what we show normally just for a bit of visibility in the businesses. We can see good profitability out of our OE, sorry, aftermarket automotive, volumes of, sorry, ZAR 315 million compared to ZAR 273 million. From a CapEx perspective, largely on track. We did budget for ZAR 750 million worth of CapEx. We did spend ZAR 316 million as planned. There is budgeted CapEx of about ZAR 440 million, largely we will look at where we're spending that CapEx, especially on maintenance, and look to only spend on essential maintenance and curtail non-essential expenditures where we can. All funding at the moment is raised at subsidiary level for our CapEx. Largely where we look to spend, we do have solar projects going on at Rombat. We do have some AGM technology projects and Baytech line coming onto line for FB.
There's some residual wire and suspension CapEx that we left to accrue in our suspension and wire business. From a Ford project point of view, largely revenues intact, at least ZAR 60 billion. A large part of that goes to Hesto. Volumes, daily volumes have stabilized since June. To customer design changes, project or product complexity has introduced complexities into the Hesto business, which has normalized since. The business will be profitable in the second part of FY 2023, together with customer, our technical partner, and Metair's commitment to make sure Hesto is a sustainable business going into the future. Thanks.
Thanks, Anesh. Luke. I think just to Thanks, Anesh, for that financial outlook. I'm sure there's going to be lots of questions that's going to come our way. Just the concluding remarks. It's been a tough six months. I think the outlook remains really positive, and we are very excited about the outlook. The new investments that we've made, especially in Hesto. We've gone from doing no business with Ford to doing probably ZAR 4 billion in turnover with Ford. It's zero to 100, of course, it's going to come with some complexity, what we're really confident on, with the support of our customer, our technical partner, et cetera, is that that business will recover, in terms of profitability, cash flow, et cetera. That's the big focus for us at that moment.
Therefore, the new investments that we've made will drive our market share growth, excluding any other projects that's currently on the horizon, combined with the OEM production in South Africa, which is still very positive. Relationship with OEMs. Our main OEMs at this point in time is Ford, Toyota, or let me rephrase that, Toyota, Ford, VW, et cetera, remains absolutely key. Staying close to them, meeting their requirements, their technology changes, et cetera, will be absolutely significant for us going forward, and we are placed to deliver on that. As Anesh mentioned and I mentioned earlier, we expect a big recovery in Hesto performance, and we do expect an operating profit in the second half of this year. It's a combination of efficiency improvements, repricing, et cetera. The outlook for that business is still very good, regardless of the six months that we've had.
I suppose long term, our guidance has not changed. We will get back to the 7%-9%, as we've guided to the market previously on turnover once production stabilizes, which is largely the case at the moment. From an energy storage perspective, after-market OEM sales remain really strong. Market share is really good. But of course, we need to address the export markets, and replacing export market losses, which is of primary focus for us at the moment. Storage and solar solutions certainly will add to the potential of this vertical over the next foreseeable future. As we've mentioned, Turkish interest rates do bother us. Therefore, we need to minimize our working capital and leverage within Turkey. We need to get that down to a level that we're very much more comfortable with.
Then in terms of capital allocation and returns, overall significant attention. We've dealt with supply chain disruption and additional safety stock, et cetera. In OEM business, we're dealing with high working capital at the moment in Mutlu. Big focus on reducing that and aligning that with our customer demand. Big portion is over the next two years, definitely ensuring that we effectively position for the future, regardless of where the technology goes between OEMs, et cetera. Our product portfolio remains really relevant, and we just need to ensure that we keep track with that, and we've got the full commitment from our customers from that perspective. Overall, we invested in 15 companies, so we continue to review the portfolio that we own. There may be some optimization and de-risking options within the portfolio that we will continue to assess in the coming months.
Have you got the clicker? Have I got the clicker? Have you got the clicker? That concludes our presentation. We at the Q&A phase. Happy to take any questions at this point.
Just a reminder to you, those who are on the webcast, please submit your questions via the Question tab. We have a question from James Twyman at Prescient. How big is the new sales hit from Russia and Mutlu? I thought much of those sales were already reduced in 2022. Is the net debt of ZAR 5.2 billion in the presentation, or ZAR 4.9 billion in the press release? What is the annual expected sales with Ford at Hesto and outside Hesto in 2023? Will it rise in 2024, or is it running at expected levels now? Do you expect the 49% tax rate to be the number for the full year?
This is you, Anesh.
Where can I start?
Okay, you need to.
Louise.
Yeah.
Just repeat them.
Just one by one, please.
The first question, how big is the new sales hit from Russia at Mutlu? I thought much of those sales were already reduced in 2022.
What I can say, I'll answer that one. We did have some sales into Russia, up until end of March this year. Last year there was no impact, because it wasn't sanctioned. I think at the end of, not I think I know, at the end of beginning of April, the EU issued a new sanctions list of products going into Russia, and that included starter batteries for the first time. Based on that, we stopped exporting to Russia, from effectively the 1st of April this year. I expect the hit, in terms of volume, I can't give you the Turkish lira equivalent, is probably around 350,000 units for the year that we will lose from Russian sales.
Thank you, Sjoerd. The next question is, whether the net debt of ZAR 5.2 billion in the presentation is correct or the ZAR 4.9 billion in the press release.
Yeah, there's two, in fact, three levels of debt, because of the structure that we have with the funders. There's a level of debt on a group basis, which is the ZAR 3.2 billion, sorry. There's what we call the CTA funding debt or the common terms arrangement debt. That is the debt that we calculate in terms of the funding agreement, in terms of the covenant agreement. There are some adjustments to that debt number. That includes Hesto, and it also includes the companies that we have minority shareholding in, which is Smiths, and Mutlu, that we do a bit of minority adjustments on. That accumulates to the ZAR 4.9 billion. ZAR 4.9 billion is the main debt number that we look at because that's our covenant basis.
ZAR 5.2 is a basic aggregate of Hesto as it stands 100% compared to Metair at the ZAR 3.2 billion.
Thank you, Anesh. The next question is, what is the annual expected sales with Ford and Hesto and outside Hesto in 2023? Will it rise in 2024 or is it running at expected levels now?
It's running at anticipated as we planned levels for this year and next year, and will rise up from the year 2025 onwards based on intel, of what we see in the volumes going forward. Largely overall it was ZAR 60 billion that we've touted. It probably will be a bit more. We need to look into what the complexities are going forward on the volumes from a Hesto perspective. The turnout for this year would be close to ZAR 4 billion or 2023, sorry.
Thank you. Anesh, the last question from James. Do you expect the 49% tax rate to be the number for the full year?
Depends on a lot of things. Turkish government for one. In any case, on an annualized basis, I would estimate it to be between the 40%-49% range. A lot of it is distorted. We don't have the actual cash or tax normalization, but there are a lot of intricacies in the tax calculation. Because of the low PBT that we have at the moment, especially out of hyperinflation and no associate profit, that range would be around the 40%-45% mark, sorry, for the full year.
Thank you, Anesh. We can see if there are any questions from the floor.
Thanks. Hi, it's Andrew Moses from Mitha. Couple of questions. How much interest was capitalized this year and last, if you can tell me?
From an interest capitalization point of view, there's been very minimal interest, capitalized into the group. It's all written off. We don't capitalize any borrowing costs as most of these contracts and the assets in progress have been below the one year threshold. It's all P&L related, which was, I think for this year, this first half, the ZAR 280 million net.
Great. When I look at the cash flow, there hasn't been cash generation for a couple of years now. Obviously, there's been lots and lots of CapEx put in the ground. If you look from an operating cash flow point of view, basically more than profits has ended up in working capital for the last couple of years. Do you just hold working capital at this point and raise turnover, or is there ongoing absorption of working capital, or what happens? When I look at it, funding the debt
Becomes problematic if you can't generate cash out of the operating business, which has been the problem for the last couple of years.
Yeah. There's two. Let's split it. I think in energy storage, we've been very focused on growing volumes. It's a commodity-intensive business. As you grow volumes, earnings, unfortunately buying lead, you funding working capital, et cetera. I think this year, given the outlook, it may reverse. These businesses are interesting. If you wanna generate capital or generate working capital, you need to wind down the business gradually. That's just the nature of the business. Then, secondly, on the automotive component side, we've invested heavily. Absolutely heavily. We're talking a run rate, ZAR 6 billion turnover per annum. That doesn't come without working capital investment. What we're aiming for is, at the moment, we probably, and Anesh didn't mention it in the slide, but we're running at around 80 some, 86 days net working capital investment. Our aim is to get that below 70, right?
Back down to 68. That just takes a bit of normalization. What we've had in the past year or two, and not to dwell on it, but the last three and a half years have been crazy, right? We've had COVID, we've had strikes, we've had riots, we've had flooding, we've had everything. We've had to put a lot of safety stock, right, in the system just to keep our customers going. I think now for the first time, we actually see if everything's starting to normalize, and now we can actually gain some traction on effectively managing that working capital down to a level where we think it is sustainable, where it should be. With the exception, as Anesh mentioned, previously, we had big export volumes out of energy, and especially the Russian ones.
We didn't send a battery to Russia without getting the cash, right? That's the one thing that will. Obviously, that's gonna remain. I think to answer your question, we're now in a position where we can actively work on getting the number down, getting it down to below 70 days, 68 days, 65 days is probably where we want to be. That is commensurate with kind of call-offs volume, customer volumes, export volumes, everything. Yeah, that's where we, yeah, wanna go.
By December this year or December next year, or what?
I do think
Next year.
Next year. Yeah.
Well, we'll be progressively working towards below 70. We'll definitely gain something by December. Whether we already at the 65, 68, we need to check, but obviously in the mid-term, short to mid-term planning, that's where we wanna be. By latest next year, hopefully by December, we can show some good progress.
Hi. Cobus from All Weather Capital . I just want to go to slide 30, where you do the revenue split for the project.
63% from harnesses. Does that mean that you just take the 63% times the ZAR 60 billion, that is roughly about ZAR 38 billion.
Yeah.
Is that the proportional share that Metair has?
No, that is a full.
That's a full.
That's a full. Yeah.
If I take the ZAR 711 million loss this year from Hesto at the 7% margin, that's about a ZAR 10 billion that you guys need to make before you guys can start reporting it in the income statement again.
No, it's more complex than that Anesh, you deal with it.
No, it is much complex, obviously. It depends on a lot of factors that go into the cost of the material. Obviously, when you count it back, we need to take into account 75%. Our estimate is not really making up ZAR 10 billion of turnover. It's really making up the operating losses that we've had, and that we would see materialize, not next year, but the year thereafter, probably in the second half of 2025.
Okay. There's a statement in the presentation about Hesto being profitable or should be profitable.
Both
in H2 this year.
Just H2.
Does that include if you separate Hesto pre the Ford contract and the Ford contract, is the Ford contract also positive, or is it the stuff excluding the Ford contract?
I would say at this point in time, it's as a company.
Okay.
There's-
You can't say the Ford contract is profitable?
What I can say is, there's a lot ongoing. Hesto primarily serves two customers. It's Toyota and Ford, right? We've got a commitment from our technical partner, and obviously, we committed more than ever to make the Ford business profitable, sustainable, cash generative, et cetera, on top of obviously what we're doing with Toyota. Toyota business is still profitable, that's running very well. No issues on the Toyota business at all. The big thing that we need to do is, and there's a whole process ongoing, is to correct the Ford business model in line with our expectation. Ultimately, where we need to end and where we believe we will end is that both Toyota and Ford business will be profitable by the end of this year. That's the intention.
Hesto
that's the intention for Hesto, certainly. What we can say is obviously post-June, now it combines Toyota and Hesto, the company has been profitable. We're not seeing the ZAR 700 million operating loss and once-off costs, and et cetera. The company is profitable. Obviously, Toyota's got a big share in that, so Toyota is very profitable. Ford is still something that we're working on, but we believe we will come out with a good result, given the discussions that we're having with Ford, technical partner, et cetera, by the end of October, beginning of November. More on that, I can't really share at this point.
Okay, just last question. On the $57 million loan to Hesto?
That's just a guarantee.
Is it just a guarantee?
There's no money that's flowed. That's not part of the new debt.
Yeah.
Yeah, just a guarantee.
Hi, good day. Bruce Williamson, Integral Asset Management. On the back of the Stellantis announcement, you seem quite positive on what government might say. Can you share any ideas that you might have?
I think it's premature to speculate, I don't want to put words in government's mouth or anything at this point in time. I certainly believe. Let me, I suppose, conceptually talk about it. Government's got a, if you look at SAAM and APDP, there's a 60% localization content target. If local producers start producing battery electric vehicles, right, which some of them may, some of them may not. Some of them may be isolated to Europe or Thailand or whatever, but the battery, the content of the battery in the vehicle is 50% to 60% of the value of the vehicle. There's no way that you can actually achieve 60% local content unless you get an exclusion or an exemption on importing battery and cells and the chemistry and whatever.
What I expect and what I suspect, is there will be some leniency in terms of, if it's electrical drivetrain, that that will be exempt, and then we will follow typically the localization process. Over time, import the cells and then there's value add. Import, assemble, produce the pack, et cetera. That will come in time. Initially, I do expect potentially on the battery side, some exemption because from a component, there's just no way that you can get to 60%. The fact that, and this is pure speculation at this point, the fact that Stellantis have announced what they have announced, they've obviously, I believe, reached some kind of consensus before announcing their potential investment. That's all I can say at this point in time. We'll be engaging with them quite strongly.
Great. Thanks for that. You sort of mentioned that the global manufacturers and OEMs are themselves uncertain where the technology's going. It's just like, what's going to happen next week?
Yeah.
You seem quite relaxed that you'll be able to cope. If they don't know where they're going, technology's changing.
Yeah
Aren't you going to be in this perpetual period where you keep on trying to catch up the leaves?
No. I think if you look at our product portfolio, that's quite significant. We're in suspension, we're in plastic, we're in batteries, we install the batteries, lighting, and harnesses, primarily. Those are the first components that you want to localize. You don't want to be shipping harnesses anywhere, given the complexity and design change and just mix and et cetera, and everything. We're very confident before an OEM makes a decision on where they're going with their technology. If you ask them today, they'll tell you, "Listen, we don't exactly know where we're going to be in three years' time. We can tell you it's going to be one of the five kind of technologies." I can tell you now, there's definitely going to be a hybrid and plug-in hybrid. The next step, whether it's battery or hydrogen, that's the big step.
Okay
That is the one that we are, I would say, protected from because we're not that exposed to it. Whether it's hydrogen or whether it's battery, we're not delivering battery revenue, et cetera. It's not that significant. There'll be an auxiliary battery. Two or three years ahead of the technology change is when our technical partners and us need to get ready. It's not going to be overnight, all of a sudden, like we're doing this. There will be sufficient time for us to stay connected with our customers, to prepare as they prepare and as they finalize their plans. I've got very high confidence in our ability to, whatever the technology is, our products remain extremely relevant, and will not be subject to not continuing doing business with them. For me, ultimately, that's the Metair design.
That's very important.
Thank you.
Yeah.
Hi. Tinashe from Laurium Capital. I was looking at your recent experience with the ramped Ford contract. You attributed the losses to scope changes, design changes, facelifts. I would have imagined that when you sit across from your customers, you actively price for these factors to try and protect the business profitability. Can you remind us again how does it actually work, and how do we recover from the sort of losses we've had in the first half?
Yeah. It's a big topic. Let me try and condense it. Typically what happens is we quote for business, right? You quote on a specific design. That design could change, right? As they do the prototype vehicle builds, et cetera, that design, they say, "Oh, this" Especially in the harness business, because that's the one we're talking about. "Okay, this wire is too short, this one's too long. Change the design, change this, change this. Now we're adding infotainment, or we're adding more speakers, or we may be adding this or that, or whatever." It constantly changes. What happens is, there's a formal design change process that we go through. If the design changes, then you quote for the design change, and then you price it into the product. Okay? That's the phase that we're going through now.
There's been 2,000-plus design changes, which is extraordinary. The first focus was obviously just keeping the customer going and delivering according to the customer demands. What we're dealing with now is how do we recover and how do we do, "Listen, this is what we quoted on, this is what we're delivering. How does that look, and how do we recover that going forward?" That's why we're saying that's the process that's currently ongoing. That's why we're confident going forward, that Hesto will be profitable and cash generative. Things like air freight, labor inefficiency, et cetera. They're some of the things that are normal to any major project, right? If you ask any customer of this magnitude and the project of this magnitude, they will tell you there's no way that you can expect to be profitable in the first year.
Of course, we're working together, and we helping each other in terms of efficiency and pricing, et cetera, but you need to learn. The learning curve is steeper than expected because the complexity is now completely changed. It's exponential complexity from what we initially anticipated. The cost that we incurred in the first six months, for me, the most important thing is we draw a line in the sand, right? End of June, we say that, "That's it." Okay. There's still discussion ongoing. Maybe we can recover some of those costs, some of the inefficiency, et cetera. That's not certain. For me, the most important thing is beyond ramp-up, because now we've reached kind of normal volumes, the at run rate, the mix, the complexity, everything is kind of settled, right? There's no further uncertainty at this point in time.
Is that beyond June, it's a completely different story. For me, that's the most important focus. Then what we can claw back, if there's any clawback in terms of pricing or once-off cost, et cetera, for the first half, maybe we can do that. Maybe we can achieve it. I think the major focus is beyond June. It's in the right direction.
Got you.
Just behind you.
Hi. It's Jan Kruger from Prof Jan Kruger Pty Ltd. I have two questions I hope you can answer. The first one, you say you had something to do with lithium mining in Poland. Is it spodumene or lepidolite that you are mining?
Yeah. We're not in mining at all. What we had is we had a lithium-ion production line. We have a lithium-ion production line in Romania. That line is equivalent to 0.1 gigawatt.
At the moment, we're not producing anything from the line. It's still a valuable line. I think given the change in chemistry and given the rate of change in automotive requirements, that line is now only fit for purpose for storage. There is demand.
It's probably lithium
It can do NMC, it can be-
Lithium
lithium iron phosphate.
Yeah.
It's pouch cells.
We're not mining. It's bought in chemistry. We can produce the pouch cell.
Yeah. Now, I ask the question because I have people that make a clear distinction between the two.
Yeah.
The second question, which I hope you can answer.
Of course.
There was a notification that Ninety One now owns 5% of Metair.
Yes.
Can you give me any more information than that?
Ninety One, they've been oscillating between 5% and 10% over the last five years. It's nothing extraordinary. They've been as high as 9%, 8%, I think as low as 3%.
You don't know anything about their motivations?
We know them well. I think they're motivated. The way they manage their funds and who sells, because it's across three funds, three portfolios, et cetera. It's, yeah.
Okay.
Yeah.
We probably take one more from the webcast and then we'll have to take the rest offline.
Okay.
The last one from the webcast from Paul Whitburn of Rozendal. How does the Ford Hesto issue impact the ROIC and IRR of the project? Is there any chance of recovering these losses over the term of the contract?
I'll do it. Yeah. We've had upfront cost, more than expected, but we do still believe over the 10-year project that we will be in line with our business case. Nothing really changes. I think from an IRR perspective, obviously we've got more upfront costs, time value of the upfront cost is going to weigh more on the IRR. Overall, going forward, we do believe that we will be, from an automotive perspective, total segmental, we will return to the 7%-9% margin. That means that we will recover the cost, but it will be future.
Thank you, Sjoerd. That will be finished for now. Thank you.