Good morning, a very warm welcome to PPC's Capital Markets Day. My name is Debbie Miller, recently joined the PPC team to head up the investor relations function. We're very excited to be with you today. It's been a busy week with conferences and the like, we really appreciate you taking the time out and thank you for joining us, where we hope to be able to bring to life a little bit the words and the numbers that you read all the time. We'll be covering financial, operational and some strategic issues, it should be a good day. The management team presenting also showcases, I think, the breadth and depth of the team. We've got quite a few team members who've traveled from far. Chrissy, Albert, thank you for joining us today.
We also have a few non-executive directors with us in the audience. Dan, thank you. Traveling down. Nice to have you. There are also quite a few people who are not presenting but have joined and supported the team here. I'm sure you'll get a chance to chat to them during the tea and the lunch break. Please do take the opportunity. I think you'll find it insightful. A SENS was issued this morning. We have freedom to discuss the current quarter in a bit of detail. As you know, this is our pre-close for the thirty-first March year-end period. We have a full program and lots to cover. We've left quite a bit of space for questions and answers after each session.
We're gonna try and keep it tight, so that we both cover the topics, give the people a chance to talk, but also a chance to hear from you, make sure that we're covering off the important pieces. Once again, thanks very much for joining us, and ask Roland, the Group CEO, to give us an overview. Thank you.
Much, Debbie. There's on this side. It's a pleasure for me to stand in front of you to update you on the financial year 2023 that we're about to close in a couple of weeks from now. Allow me a few words on the agenda and on the various speakers, because you will see in team PPC a number of faces that you might not have seen.
You'll see a number of faces that you have seen, you do not see one face that you might have been willing to see here. Our MD of South Africa and Botswana, Njombo, is on study leave. He's doing an intensive course in Harvard. Speaking from experience, I was privileged to be there as well. This is intensive, we have released him from his day-to-day job for a couple of months.
That means that I have taken on a little bit extra in the form of HR. Brenda's taken on a little bit of extra in the form of finance. The big man, Mokate, has taken on quite a lot extra as he's now looking after South Africa and Botswana for this space in time.
With me today, speaking will be Mokate on South Africa and Botswana, supported by his colleague, Dave Miles, who is looking after our materials business. We have Chrissy. Chrissy is working with Brenda, but she's also a non-executive director on the board of PPC Zimbabwe for a couple of years, has good insights in the Zimbabwe business. We are lucky that we have Albert with us as well. Albert Sigei.
He's now working with me on a number of topics. He was the CEO of CIMERWA until January of this year. He handed over, but is still, of course, well-entrenched in what is happening in Rwanda and will give the update of CIMERWA. We also have Delon with us. Delon has spoken to you in the last Capital Markets Day on our various operational initiatives.
Today, he will specifically talk about decarbonization. I would like to take the myth away that decarbonization is a costly exercise without returns. The main part of his presentation is to give you insights into why we are saying that these projects are all value accretive. We'll give you some insight in what the paybacks are and what the type of projects and why they are value accretive.
The good thing of decarbonization in our business in South Africa is that we're not yet having to make the trade-off versus environmental and financial returns. You know, for the next five, six, seven, eight years, they go hand in hand in the South African context, as well as in Rwanda and in Zimbabwe, by the way. In the broader team, allow me to introduce as well in the back, Johann Vorster and Becky.
Both of them were at a prior Capital Markets Day. They're looking after our South African cement market in inland and in coastal. Very different dynamics, and we'll touch upon those markets. We have as well, Simpiwe with us. Simpiwe is the man to ask your questions about hyperinflation.
He's the head of our group reporting, he knows all the IFRS in and out and keeps us on the straight line when we sometimes want to do challenging things from an IFRS perspective. Next to Simpiwe, we have Sibongile. Sibongile works with me, has worked a lot with Debbie as well in the preparation of today.
Thank you for that. Ailie was here as well already at a previous Capital Markets Day. She's looking after our environmental and health and safety aspects across the group. Ashrin is known to many of you. He is back with us. He sort of did a little stint outside. We're very happy to have him back, heading up marketing and specifically looking at business intelligence. With that, I've introduced the team as well as the agenda.
I'll give you a brief overview of the main points, and then we go into what we sometimes a little bit colloquially refer to as the three buckets: the South Africa Botswana bucket, the Zimbabwe bucket, and the Rwanda bucket. That overview is always against this backdrop. You saw it in the video.
We exist to empower people to experience a better quality of life, and we look at our business through the elements that you see on this slide. We are cognizant of the fact that capital has been provided to us, both by yourselves as shareholders, as well as by banks, and that we need to have a financial performance so there is a return on that capital provided.
The way how we do that is to look at providing the market with a product and a service that customers are willing to pay for, and willing to pay for it in the extent that it covers our cost of capital. Once we have that product and that market, we obviously need a group of people who are willing to go the extra mile in order to serve those customers and do that safely and at the lowest possible cost.
In my philosophy, once you have those two in place, process excellence becomes a lot easier, but it is an important element. We are a capital-intensive business, and managing our costs and making sure that we have a cost leadership position is crucial, in order to go through the cycles, and we will talk about the cycles today.
We do that with a purpose, as well as with a sense for corporate social responsibility. Company has been in existence for more than 130 years. We have always been mindful of the impact that we have on society, be it the communities where we operate, be it the trucks that we put on the road, et cetera, et cetera.
Of course, underpinning that is proper governance and compliance. This is not just well, whether you call it a nice slide or not, I leave to your judgment. This is not just a slide. Actually, behind all of this are measurable indicators that we look at on, for example, within the ExCo, a month-to-month basis, reporting back to the board on a quarterly basis in each of these areas.
When we talk about delighting our customers, what is our number of customer complaints? What is our retention rate in customers? When we talk about people, we recently completed an annual engagement survey, out of which come actions. Are those actions being completed? Financial, sorry, process excellence, obvious things that we talked about here before. What is the equipment efficiency? What is the mean time between failures? All of those are measurable indicators.
Financial performance throughout the P&L and the balance sheet, where we always look the bottom line. The two most important ones for us is the free cash flow generation as well as the margin, EBITDA margin. Those are the two main drivers, and we'll talk about those today as well. That is the context of our overall group. Some key considerations to frame the discussion that we have today.
If you look at the graph, you've all been familiar with the journey that we've walked on over the last years. We've always been saying, "We need to deleverage." The cash that we generated has been all used for de-gearing our balance sheet. You will hear from Brenda today why we believe that we are reaching our optimal state in the balance sheet.
That will then enable us to allocate capital to distribution back to shareholders. That graph you will see changing now over time. This is something we spoke about last year, and it is a moment that despite the difficult trading environment across South Africa, we will reach at the end of this month.
On the other part of the slide, I just want to make it very clear, because there are still questions that I'm getting, about legacy issues. Those legacy issues are behind us. We have de-leveraged our balance sheet. We have decided that we focus on Southern Africa. The markets that we consider core, where we want to apply our resources, are South Africa, Botswana and Zimbabwe. Obvious question, what are you still doing in CIMERWA? Some of you have picked up some Bloomberg rumors about that, yesterday or the day before. CIMERWA is not part of that. We do believe that at some point in time, CIMERWA is better off in the hands of someone who is in that region and can draw the synergies of that region.
When that moment is, that all depends on whether somebody sees the same value in the business as we see. At this stage in time, that's why we haven't communicated anything. There is nothing of substance that the board has decided upon that we have to communicate to you. That is how our portfolio works. Whilst I touch upon rumors, also there were rumors on PPC Zimbabwe.
PPC Zimbabwe forms part of our core. We have received, on the back of the Lafarge transaction, unsolicited offers as well for our Zimbabwe business. In the beginning, they were not very serious. They've become more serious over time. The board has a duty to assess them on their value. At the moment, same as for CIMERWA, there is nothing that the board has in hand that it can actually say yay or nay to.
That is our Southern African focus. I'm gonna talk about the DRC once today, that is now. If you are interested, pay attention. The legacy issues in the DRC are done. The DRC is deconsolidated from our balance sheet. We have a agreement to support PPC Barnet with management and technical services. We get paid for that, and that's where it stops. Governance overall has improved significantly, and I'm very comfortable to stand in front of you now, much more comfortable than the first time I stood in front of you, that we actually know what we're doing when it comes to numbers, compliance to laws, et cetera, et cetera. That helps us as well in dividing ma...
in putting management time and management attention on a deeper understanding of those numbers and making sure that we drive those numbers all in the right direction. If we look at the environment in which we trade, South Africa, volume and price is an issue. We will unpack that more when we talk about the South African business environment. In our view, it is there to stay for a while.
How long that while is, how long is a piece of string? Some of the fundamental issues in South Africa, around transport, around electricity, around the lack of infrastructure spend, will not change. In our projections, we are not counting on a big uptick in the volumes anytime soon. We are ready to provide those volumes. When they come, we will serve them to the market.
When we talk about the South African cement market, we have stated before, and I'll repeat it, that we are happy with our market share. We are not looking at growing our cement market share. When Mokate Ramafoko talks about South Africa, he will explain to you that we have a different market dynamic in what we call the coastal region, which is basically this part of the country, and our inland region, which for us predominantly is Gauteng, Northwest, Mpumalanga, Limpopo.
High competition, we have seen that on the back of price increases we implemented in June last year, that our market share has come under pressure and that prohibits us in increasing the price premium. The fact that, you know, there's less disposable income available. You've seen all the retailers going down.
People are trying to look for ZAR 1, ZAR 2. We cannot sustain a ZAR 5, ZAR 6, ZAR 7 price differential on the backs. We'll talk about, of course, inflationary pressures that we've seen. I would like to congratulate the team, especially on the way how they contain distribution cost. This was an area of focus that I said in one of my first meetings here, this is an area where we have space, and we're seeing now the benefits from that.
We'll show you a slide later on how our distribution costs have evolved versus external inflation. Variable production cost well contained, but still growing in low double digits. This is against the backdrop of the coal price increases that we have witnessed, as well as continuous electricity cost increases.
We are energy intensive, we will need to do further work to make sure that our electricity and energy consumption goes down, Mokate will unpack that and to some extent Delon as well in the decarbonization part. Fixed cost, they have increased circa 4%, slightly below inflation. We do see opportunities in our overall fixed cost base, we will address those in the months ahead.
We believe that in order for us to improve our results, we have price to some extent controllable. Cost, we have controllable. The volume, when it comes, it comes. Capital allocation and returns is something that Brenda will unpack. I'll show you that we have not yet achieved our cost of capital in South Africa. We are achieving a return on invested capital above our weighted cost of capital in Rwanda.
Zimbabwe is difficult to calculate because of the hyperinflation accounting. As a team, I think we stand. We have depth across the jurisdictions. We are comfortable. I do think that it's fair to say that we know what we're talking about, we know what we're doing, and we have a plan in hand to go forward.
These are the buckets, and I think it's important just to spend a little bit of time on that. Zimbabwe and CIMERWA, where we have the ownership indicated on the slide, are there in their own independence. Their capital plans do not require any assistance out of South Africa. It's self-funded. There is some further gearing potential in these countries as well. We are aiming and setting the targets for them to continue their dividend distribution and to grow those dividend distributions over time.
That flows back into the SA Obligo Group that fundamentally exists in a cement business, inland, coastal, and Botswana, and a materials business, readymix, aggregates, and ash. We will unpack the details of each of those in a moment. It is important to think about those three separately because we often get confused about the group.
What is your group situation? Ultimately, the distribution of cash back to capital providers like yourself is coming out of the SA Obligo Group. That SA Obligo Group is fed by the EBITDA it generates, as well as by the dividends it receives from PPC Zimbabwe and CIMERWA. Overall risks, macro. We are a macro-dependent business.
I've always said, and I've said it to the board, luckily I did it just after I arrived, all CEOs of cement companies look like heroes when the market is good, and they all look like idiots when the market is poor. I currently look a bit like an idiot. The fundamental question is, are we doing better than our competitors? Are we able to implement cost reduction measures faster than our competitors?
Are we the cost leader in this capital-intensive business? Do we have a sound balance sheet so that we can ride the waves of the economy? Our market leadership helps with that. The fact that we have scalable capacity, of course, helps with that. As I mentioned before, we are ready to produce the volumes needed to build the infrastructure. The fact that we have the product and geographic location.
You know, part of the country goes different than another part of the country. South Africa oversupply import competition, the imports stay. You've might have seen in the SENS that we have again made a point and a call to work with government to stop those imports and to do the job of controlling cement that is below quality. Especially in the inland market, highly competitive, we see again people taking shortcuts.
The president called upon business at the Mining Indaba to get out of our armchair. I haven't been in my armchair for quite a while. Let me just leave it with that. Energy intensity is important for us. Clinker factor is a main driver, and you will hear Delon talking about how clinker factor reduction leads to cost saving and how it also leads to decarbonization.
The same goes for alternative fuels and raw materials. Can we replace coal? Especially if you look here in the Western Cape, where we bring the coal over long distances. Can we replace it by tires? Can we replace it by what we call refuse-derived fuels, waste streams. Human capital, we have a strong team in place, but we also know that for introducing some of the newer technologies, we need to constantly upskill.
We also know that we are an attractive target to the mining industry when it comes to our engineers. We need to make sure that we provide an exciting work environment that people stay with us, and continuous skill development and succession planning is a part of that. This is the slide that I showed you at the last Capital Markets Day. Focus areas that we have between FY 22 and FY 25.
I was told if I press the button, things start to move, and there they go. Things have moved. Of course, when I stood in front of you a year ago, we didn't yet know what the exact impact of the Russian-Ukrainian conflict was. It has give us a setback, and you've seen it in our numbers.
Our cost inflation is much higher than what we had anticipated. Therewith, exceeding cost of capital for the SA Obligor Group is gonna take us longer than what I thought in February or January last year. We have a path how to get there. Driving the OEE, we're not having it in red anymore. Doesn't mean that we're done, we're on a good trajectory, I think we're getting there. Asset and cost optimization remains our key focus.
Those are the elements that we have in our control. As we speak about returns to shareholders, we continue, of course, with very prudent capital allocation. Besides cost and being a cost leader, thinking through how you apply capital to the various parts of the business is critical, and Dave will speak about it when we talk about our materials business and how we look at each of the business lines that we have in there. With that, I hope I've given you an overview. I will hand over to Mokate Ramafoko to talk us through South Africa and Botswana.
Thanks, Roland. I'm wearing a slightly different hat today. I'll give you a little bit of an overview of South Africa and Botswana Cement, and I'll touch a little bit on the market dynamics. I'll look at, you know, what we've done with the costs over time. From the costs, I'll look at, you know, what are the strategic levers for South Africa Cement and Botswana, and what are the key takeaways. I hope I'll press the right button here. That's the one. If you look at the macroeconomic indicators for South Africa, it's a mixed bag. If you look at the GDP growth outlook, relatively muted. What is promising is, you know, if you look at gross fixed capital formation, there's some recovery in the medium term.
There's been on the news quite a few of these projects that have been announced, quite a few of them around roads, infrastructure, water, renewables. I think in coastal, we've seen recent news publication of the Clanwilliam Dam. These are the things that at least they bring a little bit of optimism about, you know, in the short term. However, what Roland said is if you look at retail, household consumption is under pressure. In fact, if you look at Stats SA's publication on households, hardware, paint, and glass retail sector, quarter four of calendar year 2021 to quarter four of calendar year 2022, they show a 6% decline.
We've seen some of the cash, some of the, retailers that announced their half-year results by the end of December 2022, they're showing a revenue decline of about 4%. When you speak to some of our customers, they actually confirm that they're seeing a slowdown in the retail market. These projects, at least they bring a little bit of optimism. There's Botswana the Lesotho Dam that has been also been announced as to when it's going to start, but obviously Lesotho is a key market, for South African producers, so it brings a little bit of optimism in the near future. Roland spoke about, the dynamics of South Africa, cement landscape. If you look at inland, highly concentrated.
I think this is where we have a little bit of an advantage from a portfolio effect. In coastal last year, the performance was not that great. Inland carried coastal. This year we're seeing a swing, where coastal volumes are picking up quite nicely, while, you know, inland is under a little bit of pressure, particularly from the decline in the retail space. Also with these projects that are coming up, they are throughout the country. With our footprint as PPC, it gives us an advantage to actually supply most of these projects that are spread throughout the country.
If you look at on the other side, with the market size that we estimate, including Botswana, roughly 13.9 million tons, fairly distributed throughout the country, with Gauteng still the biggest market. Followed by the likes of Limpopo, which is really a significant market for us. With our presence in Limpopo with our Dwaalboom facility, it actually gives us access to that market.
I'll explain a little bit more around what we call active capacity and mothballed capacity. This graph actually, you know, before you start scratching your head, I will try to contextualize it. What we've done with this graph, we've taken active clinker capacities, and we assumed 80% net OEE.
In simple terms, 80% net OEE, you can say these kilns are running 292 days in a year. Out of 365 at design capacity, producing clinker at design capacity. Then we convert that to cement using standard clinker factor of 70%. This takes the noise in our assumptions. If you look at... Then we compare that against demand.
If you look at this graph, at the top there we're showing different shocks that the industry went through over time. You see entrants, number one, two, and three. I can comment about number three, because number three is when we introduced SK9, and when we introduced SK9, we had to take inefficient capacities out of the market.
The top graph, the black one that, you know, continues, it shows if we ran active capacity plus mothballed capacity, as an industry, there's enough capacity to supply the market. Over the time, the clinker producers have soft mothballed inefficient capacities. You say, "Why are we now experiencing still a gap between demand and supply?" This is because we've got other people in our system.
We've got imports, and I'll cover the imports slide later, but we also have blenders that absorb that excess capacity. As clinker producers, we are the ones who have given up to a large extent, volumes to these secondary producers, if I may put it that way, and imports. Which is unfortunate, and we are the ones paying carbon tax. These secondary producers are not actually incurring the tax.
This is really the argument that we're actually posing with authorities. This actually paints a picture of what has been happening with imports. You'll see this slide is slightly different to what you've seen before, because we've never really shown you clinker imported converted to cement.
What you see, that pink bar chart or bar on the graph actually shows clinker imported converted to cement using clinker factor of about 60%. The rationale for 60% is because of our intel, we understand that with the slag importation and clinker, you know, that clinker is converted roughly close to that number. If you look at that, there's been a steady growth over the period, and there's a slight decline in 2022. Should we celebrate? I say no, because it's not sustainable.
The decline is based on increase in freight costs as well as the depreciation of the rands. Should we really rely on that? It's not sustainable. What we're asking for is a fair, leveled playing field for us as an industry and for us that have actually put a lot of money, setting up, you know, these billions of rands to build kilns.
Also creating employment with all our social investments that we've put in this country. That's the position that we're actually putting across to the authorities. We see what the tariff on Pakistani cement has done to the decline in the volumes out of Pakistan.
You see in 2022, I mean, the tariff is well distributed depending on the source of cement from Pakistan, but you can see the impact that has, that has done. This is really what we're saying to the authorities, "Please level the playing field for us." We are continuing. You know, lobbying is under review, looking at how we can also look at other cement of other origin.
There's already a study on the way to prove that cement from other regions can constitute dumping as well. Okay. Based on, you know, the dynamics that you've seen from a volume and supply point of view, you can clearly see here we're demonstrating our price increases over time relative to inflation.
As PPC, we've always said we have, you know, 2 price increases in a year, and we've actually kept to our commitment to have 2 price a year and adjust our pricing in line with inflation. You'll see towards the tail end that the gap is opening up. I think the Russia-Ukraine conflict, you know, has put energy prices in a spiral.
We've seen, you know, relatively in terms of our cost market, slightly higher inflation, the last 2 years. Unfortunately, the price premium that we already had in the market becomes very difficult to fully pass on that cost to the consumer. That's why you're seeing that slight gap.
In FY 2023, we've seen a price increase of 5%-7%, we remain committed to really claw back on some of those cost pressures that we've seen in the next financial year. As I said, you know, with a very tough retail market, squeezed consumers, we're seeing a shift in our market. We're seeing slight drop in retail and an increase in industrial. The increase is not, you know, volume for volume, it's just proportional shift that we're seeing from retail to industrial. I think one of the things that stands strong for PPC is the brand, the quality, and the consistency that we've been able to offer the sophisticated market.
If you look at our volumes and, you know, there's been steady growth over time in the industrial sector because of the value add that we provide to customers. Retail, we squeeze consumers is all about price. You know, ZAR 2 makes a big difference to a consumer, and we've seen, you know, a little bit of squeeze in the retail sector. We remain resolute with our price increases there.
You know, with the green shoots that are coming up on the project sites, that can also provide a relief, you know, for us with regards to volumes. This slide shows our costs of production, our cost of sales, distribution. As Roland mentioned, distribution cost remains, you know, a big cost factor for us.
What we've seen in the last 18 months, 12 months, with the Russia-Ukraine conflict, energy costs have gone, have gone up from fuel, diesel, and also, you know, in South African context, our electricity prices have gone up, quite high. If you look at Stats SA's PPI, published in January, roughly 12.7%.
Our bucket of PPI, 12%-14%, because, you know, the weighting on energy is slightly higher. But we've been able to mute that a little bit. You know, our internal inflation was roughly 11%, and it's still purely because of some of the initiatives that we've implemented, in the last 12 months. Some of them is we've focused on efficient units. We ran both SK9 and TK2 efficiently this year.
It's one of the best runs that we've achieved. We've got OEEs, Roland spoke about between 78% and 82%, 83% throughout South Africa, which obviously brings in, you know, industrial excellence benefit from energy consumption. Our energy mix is slightly lower from the thermal energy consumption.
We've seen a little bit of that effect muting the impact of inflation. We've done some work around coal replacement, where we replaced expensive coal with cheaper coal at this, some of the two inland key operations. We're doing some work to get the tires up in coastal because as Roland says, you know, bringing coal to coastal is an expensive exercise. On a distribution cost, I'll cover a slide.
In the next slide you'll see, using F21 as a base, a lot of work has been done on our distribution costs. We've negotiated contracts, we've really, you know, optimized our routes, and, you know, we really squeezed quite a lot, if you compare it to inflation on our distribution network. We're continuously looking at optimizing our network as well as our operations to actually have a favorable delivered cost advantage to some of these key nodes.
Okay. Roland covered some of them. I mean, as I said, you know, excess capacity is an issue, with squeezed consumer spend, detail and re-retail and retail, we need that to be offset by infrastructure rollout to really lift up the volumes.
What can we do about it? I think inwardly we've looked at, you know, cost optimization, cost optimization, cost optimization. I think that's the one lever that we have. We engage in the authorities, as I mentioned, around the issues of import. They are taking almost 1 million tons, which is really a big portion of the domestic volumes.
A s part of the team, there's the department that we set up on innovation is to really gradually drive, you know, implementation or delivery of innovative solutions to the market. We cannot continue just doing the same thing over time. We need to start looking at how do we differentiate ourselves from a product offering, point of view, to the end user.
I think that's one of the reasons that has helped us to steadily grow our volumes into the industrial sector because of the value add and the differentiation that we've been able to implement. Operational efficiency is really something that, you know, it has to be part of what we do on a daily basis. I think there's been great progress in FY23. Still a lot more to do. We try and squeeze more water out of a rock to make sure that, you know, we get the best out of our assets. Electricity, Roland spoke about blend optimization, you know, in his slides. We know that the biggest cost when it comes to electricity is on grinding.
If we, if we grind pure cement and blend, it brings a cost advantage, especially also now with the, with the whole issues of, load curtailment and load shedding. Blending costs less power compared to pure grinding. If you complement the two, you also get a cost advantage because you can also refine your controls with regards to clinker factor control. As Roland says, clinker is your biggest cost.
So we're looking at various, some of those models to see how we optimize that, and execution of renewables. At this stage, we've signed our first PPA. Obviously, it needs to get to financial close before we can, you know, confirm the timelines. It's for 20 megawatts in inland.
We're working on another PPA because we're seeing this as the way to go. It's not only to secure power, it brings cost advantage from electricity pricing point of view. That's some of the things that we're working on. Coal costs, clinkers is your biggest cost bucket. If we can really reduce the clinker and maximize extension while not compromising the quality of the product, it's really the way to go.
We're doing a lot of R&D work around how to activate clinker, how to activate extension to try and get that cost advantage. Alternative fuels I've mentioned. Then on the human capital, there's a lot that we're doing. We've relaunched now, you know, our cement technology training.
We're really trying to get, you know, our engineers best level with regards to understanding what are the key levers of to optimizing our assets. That's really a focus area. Okay. Key takeaways, very tough retail market going forward. Green shoots coming from infrastructure rollout and some of the other projects that have been announced.
The weakness, the rand and the increase in freight cost, they help a little bit with imports, but we need a permanent solution and a permanent solution to level the playing field. We've got issues with rail network. We've got issues with electricity increases. At this stage, we do quite a lot on roads because our rail is not in a great state. How do we manage that?
With the short, we're also looking at from a network optimization point of view, to make sure that, you know, we don't get exposed with regards to rail. Energy costs are increasing. We need to look at ways to bring energy costs down. A lot of R&D actually work ongoing to look at how we lower the energy cost internally.
Again, set your asset, run it as efficient as possible, and fast track, you know, the deployment of alternative fuels to move away from coal. Be ready. You know, be ready for an upstream, because it shall happen. You know, that's all.
On the financial side, you know, we've just given some sort of guidelines in terms of where we expect the volumes to end, and the selling price, we've spoken about it, and also on the, on the, on the input costs. I will take this and hand over to my colleague, Mr. David Miles, who will actually give you a little bit of a view of where we are with our materials business and what are the things that we're going to implement in the short term, to turn around the material business. Thank you.
Good morning, and thank you for joining us. PPC is seen as a cement company 'cause they've got a proud history of 130 years. Over the last few years, we have developed a materials business, and in many cases, a lot of people don't understand the materials business. When you look at materials, we are actually three separate businesses serving three separate industries.
The ready-mix, we are serving the construction industry, be it the small builder. If you were building a garage, PPC ready-mix would serve you right up to major construction projects. The ash, obviously we're supplying a extender into the cement industry, the mining industry, as well as the construction industry. Then we've got aggregates, which is purely mainly focused in on construction.
This financial year has been a tough year for the industry. If we look at the three businesses separately, we'll start with ash. Now, ash is a good solid business, and it's critical to PPC, especially with the decarbonization program. Ash, as Mokate explained earlier, is blended in with the cement to reduce the clinker factors. Ash is running into an issue, and it's called load shedding.
If we've got load shedding, the coal power stations are not running, which means there's no availability of ash. It's critical for PPC to have a secure ash supply. We are fortunate, we have our operations at Kriel, which of all the power stations at the moment has the highest uptime. Mokate was speaking of 80% uptime. Kriel, the highest uptime is actually around 62%.
We won't talk about the new ones which are down at Kusile, which is next to nothing. We do have a good source of ash. It's a good quality ash. It is going into the cement industry. The issue we have, if retail is sinking as it has been over the past financial year, the ash business does suffer because that's where it predominantly goes, is into the blending of the cements. It's a very lean business.
It's actually scary how few people we have operating the business. The bulk of our cost is actually on distribution, which is sitting at 82% of our cost is on the transport, because the power stations are out in the Mpumalanga. Your biggest market is in the Gauteng area. We are looking at new applications for ash.
There's a lot of very exciting research being done by Eskom into soil stabilization, road stabilization, et cetera, which will expand the usage of ash. We have had a decline this year of roughly 20% on the ash sales, but going forward, it's actually looking more promising. Is that there's the We have secured projects for the new Lesotho Dam.
We will be exporting up into Lesotho, as well as the new expansion for blending plants on the PPC side. Going forward, ash will look a lot more promising going forward, but it is a very cost-effective and profitable business. The Readymix side is where we are supplying the concrete. We're taking the cement with our aggregates ash and giving you a finished product. It's integral to PPC. To a large degree, it is protecting the cement offtake.
Our return on our assets and our margins are actually measured in combination with the cement consumption. Readymix at the moment is the largest bulk user of cement from PPC, and it's always regularly in the top five offtakers. It's a critical part to secure that cement offtake for the two factories up in the inland region.
One of the things with Readymix, it's very susceptible to rain and a downswing in the construction. With the construction markets being in a total downswing at the moment, you have to try and move that business as far as possible to a variable cost business, which we are currently going to be doing, and as SENS has announced. Material costs, believe it or not, of that concrete is 65% of our selling price. It's just purely materials.
If we can reduce those costs as much as possible, it has a positive impact on the bottom line. Doing that with the likes of ash is also reducing the cost and also reducing the total carbon footprint. One of the areas that we have in Ready-mix is we can take a plant, put it up for a project, say for a wind farm or a solar plant or a road project out in the middle of nowhere, do the project, take it down and move to the next one.
That's one of our strategies, is to actually increase our footprint with projects. At this stage, volumes are looking flat going forward. Cost containment and fixed cost reduction is the strategy going forward. On the aggregate side, this is the business that has hit the hardest this financial year.
We're sitting with 2 quarries located in the northwest of Gauteng. Aggregates, unlike cement or ash, actually doesn't travel much further than 30 or 40 kilometers. Further than that, it's just not viable and people will go to other suppliers. With the area we're in, with no infrastructure developments being done, the business has been hit hard and we have lost significant volumes.
We will be structuring that business in line with what our current market is asking for so that we can get back to a positive cash contribution. One of the big advantages of our 1 quarry, Mooiplaas, which supplies a dolomite, it's not limited to the construction industry. That material is also very suitable for use in the agricultural industry, where they use the lime to stabilize the soils.
This year, with all the floods up in Gauteng, farmers actually haven't been plowing that much. That was where we were negatively impacted. Also, the metallurgical material, where it's used in the processing of steel, and then chemical, which goes to Sasol, and they actually make fertilizer for it.
That's gonna be a big focus, is to generate those markets going forward. Year-on-year, volumes, as I say, similar to ash, are down roughly 20%, between 20% and 25%. In summary, the materials business is a vital part of PPC, especially on the ash for the decarbonization. Ash will continue to carry on as it is, and there will be slight growth. We're expecting slight growth in this new financial year.
The Readymix is a valuable member, and it's critical to the cement guys because it is utilizing a lot of their cements, and it's protecting the margins as well. We need to remember, we look at. We measure the Readymix in combination with the cement. Aggregates, yes, there is going to be.
We are gonna restructure that business. It has to turn around. Otherwise, if it doesn't turn around, we will probably look at disinvesting our aggregates, which is not something we want to do, but it has to remain cost positive, as it needs to be a standalone business. It's not critical to the cement side. Hopefully, and I'm sure 2024 will be a better year for the, for the materials division, and it will return back to where it should be. Thank you.
Thanks, Dave. I'm just making sure Bandile's got. We've got 1 question online, so we've got about 10-15 minutes for questions. I'm just going to coordinate everything here. I've got 1 question from Rowan Goeller from Chronux online. On cost increases, the industry was talking about aggressive price increases to recover cost inflation. This has not happened. Can you talk through the competitive dynamic in the market right now?
Thanks, Debbie. I've got Becky and Johann. I wanted to put them on the spot, but I'll try and answer that question. Rowan, yes, there were announcements of double-digit price increases by various players in the market. We've seen one that has really stuck to their increase, backed off slightly over time because everyone else, some of them, they postponed their price increases.
In our case, double digit was going to imply that, you know, we increase our price premium in the market even much higher. In some markets, I mean, we had price premium in excess double-digit price premium before the price increase. Especially in retail. We actually had to, you know, our price increase was not double digit. What we wanted to make sure that, you know, we don't overprice ourselves in the market. Yeah, some of them, they're postponing their price increases.
From the audience, any questions? I've got no more questions online. Are there no more questions in the audience?
I've got a question that relates to your competitors. I mean, if you're operating at sort of 10%, 11% EBITDA margins, where does AfriSam and Lafarge operate in? How do they stay in the market? I mean, are you cash positive at this point or not even there?
I don't have that intel, but I can tell you, it doesn't take one to be a rocket scientist. You know, we are shielded by, you know, portfolio effect, being exposed in different regions. You can imagine somebody who just operates in an inland market, you know, probably a little blood bath.
Yeah. Just if I may add to that. If I may add to it, Paul. If you look at our inland business stand alone, right? Either AfriSam and Lafarge and Sephaku and Mamba are doing absolutely something magic that we don't know about or your conclusion is correct. Follow-up question is, how long will it last?
That I don't know.
That's a follow-up. Yeah. Just in terms of the imports, I mean, you successfully got the Pakistan cement out. Vietnam seems quite large. I guess the other component which I worry about is that China is quite small, and with the sort of property issues they have with all the capacity, why isn't Chinese cement coming to SA? Is it naive to think that the government would ever do anything to change it? I mean, British American Tobacco are having similar issues. Across the board, across all industries, it just seems like no one's getting any help or with stopping imports.
I'll try and answer that. Sorry. Let me just get my mic up. If you look at China, they've got huge pollution issues. Sorry. They have a huge pollution issue. That's why China, over time, they've actually discontinued running some of the inefficient operations. That's why you don't see a lot of imported cement out of China, because they are running efficient capacities to meet domestic demand. Yes, the risk remains, Vietnam. That's why there's a study at the moment to look at the justifying our argument that there's a possibility of dumping.
Thank you. How's it, guys? Just briefly, you have one slide that you're doing blending. Does that mean you're gonna go into blending? Is the one question. Similar to Paul's question, I mean, if the guys are suffering, how is the blending market coping in this space? Is that an opportunity for you to, I guess, like you showed, you're producing all the clinker, you're not getting the volume. Can you gain net volumes? If so, what's changed since since back then versus now in your strategy?
We're doing blending. We've been doing blending all the time. You remember we, you know, we bought Safika a while back. We do blend. We are just expanding our footprint at the moment. Getting closer to the end consumer. You know, we're setting up an extra blending facility closer to the consumer that we should commission.
Are you seeing the number fall down? I mean, everyone's suffering from load shedding. Surely they should also be hitting... I mean, they don't have the kind of balance sheet that you guys have. You know, are you seeing some consolidation in the market, I guess?
What you see is, I think the biggest thing is who's providing this blend of cement. You know, are we pricing our cement to the blender properly to encourage the right behavior? If you give a blender bulk cement at a discounted price, you know, they will just go. That's really the issue. We need, you know. The only way that you can see a decline in blended cement from independent producers is if the bulk cement is priced properly.
In terms of our strategy, it hasn't changed. We just to build on what Mokate said. We are building a new blending station to serve the market in Limpopo. Where is the blender's competitive advantage coming from? It's number 1, is somebody supplying him cement at a discount?
It's also does he have access to ash or slag? If they are strategically positioned close to a power plant and it costs us more to distribute, they might have a competitive advantage. What we constantly do between Mokate, Becky, and myself is to look at the market and say, "What's the cost to deliver into that market? Could we put up a blending station there?" Right? The other question is can we supply directly to a blender? So far our pricing is not attractive enough to them.
If I can just ask a question around on the consolidation side. I mean, if you look at talks about your disposals in the future and, you know, where your balance sheet is and after those disposals you'll be in a quite a net cash position. I mean, how do you think about is consolidation just not getting a lot cheaper and cheaper where peers are?
I mean, would that be a logical thing? Is that changed? 'Cause, I mean, there's always been pushback on that and what's logical and just anything on that front, what's changed? Is it making more sense, and are those prices around consolidation getting a lot easier to do? Thanks.
Look, I've always said that consolidation is not the answer to our problem on volumes. That of course stays, right? Consolidation doesn't change any of that. Consolidation wasn't a theme in our management discussions, let alone board discussions, because we were just busy with restructuring the whole thing and putting 2 bad things together doesn't make wonders either.
Where we stand today and consolidation is something that we are more actively thinking about, okay? We do know Lafarge was actively looking for a buyer, CIMERWA was actively looking for a buyer. AfriSam, we understand, is in the hands of banks which are normally not long-term owners. We've done a study on what fits best to us. Benefits that we dare take into consideration are distribution and our admin overheads.
Because one of the challenges that you're well aware of is the moment you go to the Competition Commission, you know, one of the first conditions is you cannot use this to close down facilities. That there is no benefit in that on any time on the short front. The next step is, you know, is there a willing buyer, is there a willing seller?
You come to valuation discussions, and we're going through a cycle. If you are currently sitting on a site that you want to sell something, you might want to say, "Look, maybe we need to wait a little bit." It is more actively thought through than anything that I've ever been at PPC with, but it's also not something that is easy fix. You know, you have competition issues, and you have valuation discussions.
In front. Okay.
Hi, guys. Thanks for the time. I wanted to just ask on your inland retail bagged market share. It looked like from Cashbuild results, there was a significant drop-off in PPC's share. Can you maybe just comment a bit on, you know, was that something? Was it pricing? Was it strategic? Just some comments on that.
What you see with the Cashbuild . Sorry about that. The disposable income going down, so a price premium where 5 might have been acceptable, you know, now it's not anymore. You know, we also have seen, though, that in some of our independent customers, and we're looking at Becky to comment for the details.
We have been able to pick it up, but our inland, especially retail bagged market share, if you go to that level of detail, has declined. We've picked it up partially in our industrial. That's why our overall market share in inland is under pressure, as we say, but it hasn't fallen off the cliff. We see that shift.
Thanks. It's to do with the imports. You've been speaking about it for years now in terms of, you know, submissions and, you know, it's like you've put in a submission. I think Roland van Wijnen is hardly away from the minister, you know, not to speak him directly about it.
What's the level two plan or the plan B, to put you that way? It just seems to. There seems to be no resolution, not just in cement industry, as somebody earlier said, in other industries also, where you have these dumping and things like that.
The level two is to live with it. The only way to live with it is that you create a cement market, ultimately in certain zones of the country that are particularly exposed, like you've seen in other parts of Eastern Africa. You get prices that swing depending on the freight rate and your dollar exchange rate.
You get ourselves, for example, saying, "Well, we don't need to produce it anymore, clinker. You know, we'll bring in the clinker ourselves, and we start a grinding station." You know, you either play the same game and you become an importer and you heard the video, you know, we're very proudly South African, and we put it on our silo in PE. I'm not sure if you've seen it. You would lose 400 jobs directly in the cement factory and big number of them indirectly.
The pricing will be as Roland says, it will be all over the show depending on.
Availability as well.
Availability. What's the road blocks from government? I wish I had a blue pill for that too. It's just the internal process. It's just taking too long.
It's taking a long time. We do get, and this was in the media, I'll speak around it. You do get almost a tit for tat. I'll give you a little bit of input protection, but you have to promise me prices don't go up. We go like, "Well, we can't do that." You know, look, well, we do that if you promise me that electricity doesn't go up for starters or that we have it. You know, those are ridiculous discussions. We're not entertaining.
You know, we can't go down that path. Hey, you know, I have to be a bit careful what I say because we are in discussions, and we have to work, as the president said it, out of our armchair, shoulder to shoulder. One thing, you know, let the private sector do their stuff, you know.
Just give us a level playing field. That's all we're asking for. You know, we're not asking for protection so we become a lazy industry. All we're asking for is look at the price of clinker in the boat, in the vessel in Vietnam, you know that it is variable cost plus. You know, you've seen it in Pakistan. Yeah, it's appalling. It's... Yeah, okay.
We've got 3 minutes left of questions. I've got a couple more online. I don't know if we've got more in the audience which I obviously wanna give priority to. Thanks.
Perfect. Yeah. I just had a question just really on demand. You know, you speak about this infrastructure, green shoots. I just wanted to understand is the bulk market more or less favorable for the blenders? Given the kind of the nature of the market or actually it's.
Serve retail markets.
Okay. It's mostly retail.
Yeah.
I mean, it sounded like, you know, in the same statement that you're still quite cautious about the environment, very cautious, and yet again, you speak about these green shoots. It's really a function of that you expect an acceleration in the decline in the retail market?
Yeah. We've also been cautious, and we remain to be cautious because we want to focus on the things that we have in our control. We don't want to fall into the trap that we say, "Look at all the tenders being awarded. You know, you guys don't worry, everything is gonna be rosy." Because we haven't seen it.
I understand. Then maybe just lastly, just on the competitive dynamics in the bulk market. Like, is it a market that you naturally have higher market shares, et cetera, or it depends by region? I just wanted to understand how you think about the competitive dynamics.
The bulk market is a market that usually, and Dave knows this very well, that likes a consistent quality of cement, and preferably a good quality of cement. It's in that order. Consistency is even more important than quality. The current producers, there are probably three in the inland market that can properly serve that market. Amongst one of them is ourselves, of course. Blenders don't serve the market because they don't reach that consistent quality, and some of the integrated producers don't serve the market either.
The other thing is, if you look at the one kiln operator, what makes sense to maximize your volumes to serve the bulk market because you can extend your cement as high as possible. What we've seen over time with these one kiln operators, they focus more on retail because that's where they can maximize their volumes. Unfortunately, you know, as retail gets under pressure, they start scraping now for bulk volumes. That's.
Also what... Sorry, Mokate Molaolwe.
Sorry. Continue.
What is important that the bulk markets are more sophisticated customers.
Yes.
It is not that that is a market where you immediately command huge premiums because you're dealing with people like Dave, they're big, you know, they take big volumes. They first talk about price, then they talk about price, and then they talk about price. They have professional procurement departments in some instances. It's a completely different segment where you don't necessarily, because you have less competition, would expect a lot more value.
Okay, we've run out of time, but, I've got one more question then I'm gonna pose to you from the online. Please give an example of mothballed capacity that you have in PPC? Also, do you have the mothballed capacity in the market given your market share?
I'll comment on PPC's mothballed capacity. I think on the slide we talked about 4 kilns inland. SK8, Slurry is mothballed, as well as Dwaalboom kiln 1, is also mothballed. other 2 is somewhere in Lichtenburg.
Great. Thanks. I think, we're done with South Africa and Botswana. Thanks, Mokate, Dave. Roland, thank you. Chrissie, Tawanda Masarira, is gonna chat to us now about Zimbabwe. Thanks, Chrissie.
Thank you. Good morning, everyone. I think Roland did justice to introduce me to everyone. I'm working with Brenda, and I also sit on the board of PPC Zimbabwe. Starting with the market dynamics, I want just to recap in terms of the market in Zimbabwe. I'm sure you're familiar with the map of Zimbabwe.
Zimbabwe's market is divided into 2: the northern market and the southern market. The southern market is where we have got our strong presence, though we have got a strong presence across. Our clinker facility is in the south, and also we've got a milling plant in the south and a milling plant in the north.
In terms of how our market is structured, you'll see that we have got a very strong position across the country. We serve our customers using the facilities that we have in the south and of course in the north, with a very robust optimization in terms of supply. The one thing that I wanted just to highlight on this map is what has actually happened during the past year, particularly related to imports. If you see in the north, we have actually seen a bit of an increase of imports coming from Zambia. You see below the pie chart that shows you the regional market.
We're surrounded with lots of excess capacities in the region, starting with, of course, South Africa and of course Zambia. We see some impact of imports coming through, particularly in the northern market, from Zambia, but also some various players coming from, South Africa. The other development that has happened in this market is one of our competitors in FY 2022 increased their capacity. From around 500 to about 900, that's competitor A that you see on the right-hand there. Despite all this, PPC Zimbabwe continues to command a very strong position.
On the issue of the impact of the imports, the major driver has been, and you'll hear me speak about it most of the time as we go through the slides, is related to our H1 major maintenance that took place in PPC Zimbabwe, and that's why we have had a bit of increases in the imports. In terms of the industry capacity, I think this slide is very important for us to understand in terms of how we have actually evolved as an industry. The major players in the industry in the past years have had some operational challenges. With the improvement now in the overall equipment efficiency, we see growth, so that's the red bar that you're seeing.
Again, we see that because of that, there was quite a big gap in terms of the capacity and the demand. The line that you're seeing in red is the demand, overall for the national demand, and then the red bar is the industrial capacity. Obviously, you can see the gap there that is being filled in by clinker imports and cement. The clinker is PPC Zimbabwe importing from the various sources, either in South Africa or within the market or even in Zambia. Then also we see the imports that I talked about earlier. Clearly there's been that gap that we have actually seen from FY 21.
The good news is the initiatives that we are embarking on and related to the projects that we'll be implementing starting from FY 2024. In addition to the initiatives to improve the OEE, our fly ash project that we're expecting to come to be commissioned in FY 2024, we expect it to release some capacity to the market and also the calcined clay project, which my colleagues will talk about it later in detail. That also we expect to release some capacity to the market. These projects initiated by PPC will in addition to decarbonizing the industry, you'll see that they will release some capacity to clinker and of course cement.
The gap that has been created and has been filled by imports either of cement or clinker, will be filled up by these capacity improvements to be done by PPC. Just to take you through our distribution channels. PPC Zimbabwe, we continue to see retail being the largest contributor to our total sales. It's our biggest channel today.
Despite the challenges that we faced in the first half of the year, and we saw a bit of a decline in retail, we saw some massive increase in the construction segment and also CPM and mining. CPM and retail suffered a bit because of the product supply driven by the issues of the plant issues that we had, the major shutdown that we had at the beginning of the year.
Having said that, we are still working on strengthening our presence through the retail space that supplies also to the contractors and the end users, and also focusing on our CPMs. Clearly, it's a very important segment for us, how we do that is to continue to have very close partnerships with our customers.
Also, we have engaged actually technical sales representatives that support that sector and also the construction. Construction is a major one as well, followed following retail segment. As you can actually see, it's contributing 20%-25% of our total volumes. With the projects that we are seeing, in Zimbabwe, actually, I'll talk about it later.
You'll notice that our growth in terms of the demand is being driven by the retail and infrastructure development. That actually comes under our construction segment space. We are focusing on this space as well as it serves our civil space, civil contractors, residential, non-residential, so that we can actually grow that segment.
Another important point to note here regarding our distribution channels is also how we deliver our cement. Yes, we are currently at about 77 to 23 split bag and bulk bag. We're still putting together initiatives to grow that bag market. That's why we're focusing so much on the construction, so that we can actually deliver bag cement. Why bag? This is where we have got higher margins in the bag deliveries.
I'll come back to the issue of cost that I talked about earlier. PPC Zimbabwe cost for us is very critical. Not only because of the cost inflation that we talk about all the time, but it's just the general environment in Zim. I mean, the policy changes and everything else is quite difficult, sometimes very uncertain. In terms of the contribution to Zimbabwe cost of sales, that pie chart, that's what it is actually telling you.
Yes, our major challenge or major contributor is the transport, but it's because of how we are set up, as I've explained earlier. Our Colleen Bawn clinker is manufactured in Colleen Bawn and transported to our milling plants, which are miles away from the clinker production facility. Yes, transport is the biggest issue.
Before I even speak about this transport, the challenge that we have had, particularly in this year, has been the performance of the plant. That has got quite a big impact on the cost. In cement, as you know, if we don't run our kilns regularly, if we don't run them consistently, the challenge is always the cost because this means that your heat consumption, your electrical energy becomes very high. The key focus area for us to address the cost in Zim is to focus on the industrial improvement so we can optimize on our kiln overall equipment efficiency because that will bring us quite a lot of cost benefits, cost savings benefits.
Now that we've completed and commissioned the big project that took us quite a bit of time at the beginning of the year, the bag filter and the bag elevator, the focus now is to optimize on the improvement of the industrial performance. That will bring a lot of benefits. Heat consumption will come down, electrical energy consumption will come down, and various other efficiencies because if you operating the plant consistently, you avoid plant stoppages, there are so many improvements that you can actually benefit from the cost perspective. The other challenge that we have actually had in Zimbabwe is the stability of power. We have had a lot of, you know, stoppages that relate to power.
We have done an analysis of this and we find that most of our stoppages when we really look at the Pareto analysis of what causes our stoppages in our operations, we see that over 20% of the stoppages are because of power. This instability of power is causing quite a lot of challenges, not only for volumes because we're losing volumes anyway, we can't produce, but also our costs are going up again because it takes quite a lot of energy for us to start when we stop to start the equipment. In addition to that, the equipment gets damaged and as a result our maintenance costs go up. It is very critical for us to focus on stability of power, the quality of power.
What we're doing at the moment, you see it in the risks and the strategy levers that I've actually outlined in the coming slide. We are discussing with the power authorities, but most importantly, the projects that we are putting together for the solar for both the Bulawayo factory and Colleen Bawn. Another factor that or key focus area that we will focus on to address the cost structure in Zim are this clinker factor reduction initiatives.
I think you heard what South Africa is doing. It's across actually the group and I think later on you'll hear from Delon in terms of the specific initiatives that we're trying to do. That also applies to Zim. We want to secure extenders, fly ash. The more we extend the clinker, the cheaper it becomes to produce clinker.
Also, in the medium to long term, we need to accelerate the execution of this limestone, gypsum, clay. Again, I'll leave it to my colleague later to explain more on this. Fixed cost is another area that we continuously look at and going forward we will also focus on this so that we can just manage our fixed cost structure. Logistics, as I've already mentioned before, the way we are set up, we are always looking at opportunities on how we can optimize with backhauls, negotiating the rates, trying really to understand how else we can actually bring the cost down because the challenge that we have with the transporters and in the environment like Zim, sometimes we push to pay in U.S. dollars, that pushes the prices up.
Just talking about the US dollars, let me just preempt here in terms of the cost structure for Zimbabwe. All these costs that you're looking at here, I will talk about the Forex sales later. Most of these inputs, 30% of these raw materials, packaging and part of maintenance we import and pay in foreign currency.
Because of the situation in Zim where we are using multiple currencies, this costs, roughly about 70% are being paid in US dollars and about 30% in the local currencies. I thought that is a very important point to just highlight so that we understand the cost structure in Zim. In terms of the risks, some of them I've already addressed, production has been our biggest risk.
We believe that with a major maintenance that we had earlier in the year, the first half of the year, extended KSD. Not only did we do the bag filter, but we addressed other issues that were causing the stoppages. We are believing that our OEE, net OEE will improve, our industrial performance will improve, and therefore be making available product to the market and restore our market share.
Stable and consistent power supply, I've talked about it. The main strategic lever there for us is to accelerate the implementation of the solar solutions for both Colleen Bawn and Bulawayo factory. I'm pleased to say here that progress has been made. We have signed an IPP with one of IPP supplier, and we are in the process of finalizing.
We are hoping that financial close will be reached March end of this month or early next month. We are really looking forward to commission somewhere early FY 2024, calendar year of 2024. On a daily basis, actually, and this is really on a daily basis, engagements with the electricity supplier.
The team continuously engage them to just see if they can actually help us to give us the power so that we don't have this inconsistent supply. That is very, very key for us. Rising input costs. Yeah. This again is a big issue with all what has happened with the commodity prices, particularly on the fuel.
Our strategic levers, I've actually said renewables, solar, clinker factor reduction, plant optimization, they are very key. We also face a logistics capacity issue. Our logistics capacity issue, we are believing that the use of the road negotiation with the transporters will help us to address that. We move our clinker from Colleen Bawn using the rail. Rail is a very critical logistics service provider for us.
Imports, I did highlight at the beginning, big issue for us, particularly during the year that we had some issues with the production. Now that that is behind us, we'll be focusing on producing more and having also consistent quality product across the market and lobbying the ministry because we also saw some elements of imported clinker, imported cement, which has got issues with the quality.
Again, we'll be lobbying with the various authorities to ensure that we have got a fair, level playing field as far as the quality of the products are concerned. Local regulation, this is a continuous engagement with the stakeholders, the ministry, reserve bank, and again, repatriation, we'll continue to sell in local currency.
In terms of Forex sales, again, this slide just shows that we are tracking still well. Our Forex sales continue to grow. We are tracking about 80% year to date as of January, and these sales are coming from our domestic foreign current sales. FDI continue to contribute to that. Diaspora platform also it's working. This will help us to continue to repatriate dividends to PPC Limited.
The capital investments or CapEx for fly ash and everything else, our expectation is that, we are going to gate date, but with no request to PPC Limited. In terms of the key takeaways, 3 or 4 things for me. Despite the challenges of Zimbabwe, the demand continues to be strong. The market is there.
What we need just to do is to work on production. We focus on industrial performance, make sure that we secure the production to save our markets, and then we secure significant infrastructure projects, because these are driving the growth in terms of the demand, restore our market share, and maintain our Forex sales or our sales in Forex over 70% so that we can generate the free funds to be able to repatriate dividends. Financial expectations.
We are expecting that our volumes will decline between the ranges of 14%-18%. This is because of the gradual recovery of the market share following the maintenance work in the first half of the year. We expect that dividend will continue to be paid biannually, and our margins are expected to recover in FY 22.
Let me point out here that we do manage our performance in Zimbabwe using the USD parallel, because we want to take out the hyper noise in our numbers. All these numbers I'm talking about are based on USD parallel. This is our expectation for Zim. I'll end there for now. Thank you.
Thanks, Chrissie. I've got a question online, but is there anyone in the room that has a question for Chrissie? Charles.
Maybe if you can just help us a bit just with an update on the market dynamics in terms of general pricing per ton in the market. I mean, I think looking back in my notes, I think it was like $200 a ton in the 2015 period, it kind of dropped down to $125, $130, I think of late. I suppose where I'm going with it is half the inflation accounting is, you know, obviously a lot of nonsense really. We're just trying to look at what is the reality on the ground, your capacity times by market pricing and try and work backwards from that point of view.
Maybe if you can talk to that and also just an update on the workback from kind of current market pricing to what you as PPC get in your pocket as well. The follow on maybe, follow on question is, obviously, you've had some expressions of interest in this asset.
You can either look at it 2 ways, a dividend, you know, a dividend model, and you value it just as dividend stream of $8 million-$10 million a year, or you obviously have a stab at looking at it and at the actual underlying financial performance of the asset. How... If you're gonna sell the asset, you're obviously going through that process yourself. Maybe if you can just talk to us as to how you think about valuing PPC Zim at the moment?
The market questions. Yeah, Chrissie .
I think in terms of the market, what I can actually say is that I think what we've actually noted over the past year or two, we were able to put up as PPC quite a reasonable price increase, if I can put it that way, to recover our cost increases. The market has been able to take the price increases. In fact, if I really compare this year and last year, we have actually managed to gain a double-digit in US dollars price increase, which the market has been able to take. Yes, of course, with the impact of the imports, there's a bit of pressure, particularly in the north, in terms of the pricing.
Still we see that the market has been able to sustain, and this I've actually highlighted in my two key takeaways, that we have actually seen solid pricing over the period. We don't expect that to change significantly, that the market will still be able to sustain these price increases.
Would that imply we're kind of at $130-$140 per ton at the moment on market on average?
Mokate walks around in the market.
I can take that, Charles. Sorry, let me come to the front. With a double-digit price increase, that or price increases that we've had in the last 12 months, we've seen prices retaining very close to what you said earlier.
Mm-hmm.
Close to 200 in retail.
Yeah.
In terms of the M&A activity, Charles. We're, we're fully aware that a lot of people look at our investment in PPC Zimbabwe on this dividend model. From our perspective, it has to be looked at a DCF model using the US dollar, and of course, you get quite a significant gap. Right?
In my opening remarks, I did say that we got a number of unsolicited offers, and that especially in the early days, they were too low for us to even consider them, bring them to the board. That was because they were most likely based on a dividend discounting model using all dividends on top of it. Right? Those kind of things are not interesting for us. If we are to be looking seriously at an offer, there are three considerations that we apply.
Number one is whether the value properly reflects the value of the business in terms of a DCF. Number two, whether the counterparty that gives the offer is creditworthy and can actually write out a check, and is not on a sanction list, preferably. Not preferably. Number three, can the deal be done swiftly? We don't want a protracted long sort of process.
The solar IPP, is that gonna be signed in USD, the off-take agreement? How does that affect your dividend going forward? I mean, because now your costs are going up. Maybe just what's your cost in USD then. You gave a split earlier, but how does that affect it going forward?
Our electricity, you know, has been going back and forward between USD and local currency.
Local currency.
We just switched back to USD, and we hope in exchange to get a power guarantee. Well, you wanna pick it up further. The IPP is below. Yeah. If you look at, as Rowan says, before the introduction of the ZwL, our electricity was always in USD. Purely because we signed an exclusive agreement with ZESA that they will ring-fence our supply and guarantee consistent supply of power. We paid in USD for that. When there was a shortage of currency, you know, obviously we raised our hand and said, "Help me, God. We cannot really give you US dollars. Let's go back to ZwL." We went back to ZwL.
In recent times, the discussions has been, "We secure you power, you pay a mixture of ZwL and US dollars." That's where we landed. Now they're actually moving more to US dollars. In fact, we are in a lot of debates with ZESA around, you know, the payment for power. The, the solar comes with a significant reduction in tariff. It's close to 65% of what we pay for the grid in US dollar terms. The debt financier wants the money to be externalized, and we said, "Look, it's not for us to tell you that it's possible.
You have to go to, you know, the Reserve Bank. I was in Zim not so long ago, they got a letter, a confirmation letter from the Reserve Bank that the money can be externalized. Because the situation in Zim is cyclical. If there's no foreign currency, it's not our problem, you know.
Maybe one more. Just on your plan, you obviously have planned CapEx rollouts. That looks like it's expansionary in nature. How do you then affect... How does that affect the dividend going forward as well?
You wanna take it?
It's your favorite.
I will. In terms of the dividend, we don't expect any impact on the dividend because I think the solar, since it's an APP, is actually basically off our balance sheet. We've got a very small CapEx that we'll be investing in the solar just on the connections. Calcined Clay, yes, in the outer years, but that has been already factored into our cash flows, and dividend will not be affected.
The idea is that we debt finance.
Yes.
Correct.
Sure.
Yeah, yeah.
Yeah.
Sorry. In the back here, Mandy.
Hi, guys. Can you just remind us with Zim, I was just trying to work through sort of dividends versus free cash flow, but what is the payout ratio and just remind us what is the payout ratio and maybe give us an idea. You know, I was trying to work through numbers. I mean, $8 million dividend, I don't know, 8% yield. You kind of get to $1.5 billion-$2 billion value, and whether that's somewhere in the ballpark or am I getting something wrong there?
The business under normal circumstances should turn out about $30 million-$35 million in EBITDA.
Yeah.
It depends a bit on the CapEx profile. We don't have a policy. We have a policy, but basically how we're managing the dividend flows out of Zim is we look at the cash forecast, and we take as much out as we possibly can twice a year. That ZAR 10 million, or ZAR 8.8 as it was now, will grow to ZAR 10 million. Once we do the Calcined Clay project, this is a bigger project, we will refinance it. We'll finance it through.
Through debt.
... through a debt profile. On the valuation of the business, I'll leave it in the capable hands of Axcel. It's plugging numbers, you know. At the end of the day, look at a business, ZAR 30 million-ZAR 35 million on EBITDA. Apply a multiple. The business is debt-free at the moment. You have numbers.
Yeah. And also we've gone through high CapEx cycle the last 2 years, I mean, with all these big projects, so that should start to taper down, doing more maintenance CapEx, out of our own cash.
Are we done? Great. Well, time for a break. We'll see you back in here. I think we just make it 5 past 11, we give a good 20 minutes. Thanks. Welcome back, everyone. I hope you had a good body break if you're online and coffee and tea and refreshments if you were here with us. We've been through South Africa and Botswana. We've been through Zimbabwe. Albert Sigei is going to come and tell us all about Rwanda or CIMERWA. Thanks.
Good morning, everybody. Yeah. We move from Southern Africa to the Great Lakes region, Rwanda, which is fondly called the Land of a Thousand Hills. Like my colleagues, I'm going to take the same flow basically, you know, market dynamics, we tackle the costs, we move on to risks and strategic levers, key takeaways. Starting with the market, I think, you've probably seen this map before. Rwanda is tucked in, you know, about more than 1,000 kilometers from the Indian Ocean in the Great Lakes region. We are located here in the southwest corner, close to Burundi and also bordering the Eastern DRC, which is part of our natural market.
Our natural market, basically is Rwanda itself, Burundi, and Eastern DRC. We do, in terms of flows into the country, we have imports coming in from Uganda, Kenya, from also Tanzania, and exports going into the Southern DRC, the South Kivu, which is this part, and then the North Kivu. The North Kivu is very famous for the volcanic eruptions.
That is where Goma is located. Most of the imports are coming from Tanzania. Our market share, we have managed to keep it within our target range, which is 40%-45%. We've got one competitor, a grinding station, and we are the only integrated player in the country. Our competitor has a market share in the range of 15%-20%.
You may ask why, considering that, you know, we have around about the same level, 700,000, in terms of grinding capacity, why do they have a lower market share? It's simply because of the difference in business model. They're a grinding station, and we are an integrated plant.
Also, a big part of the capacities within the country are actually purposed or, you know, posted to the export market, particularly the Eastern DRC, which is a very resilient market. Pretty soon, we hope to see another green arrow going to Burundi from our plant. This is a market which where the borders have been closed for political reasons over the last several years.
The good news is that recently those borders have opened up. We, you know, trade of commodities is now possible, but they are facing some, you know, teething problems to do with Forex availability in Burundi and so on. That's the market, Rwanda market. In terms of the evolution of the market, I think the good news is that this has been a market that has gone very steadily with a CAGR of about more than 10% over the last five years. In fact, we forecast that the 2023 size will cross the 1 million metric ton mark for the first time. It's a very steadily growing market.
This growth is backed up by a good GDP growth and also a healthy pipeline of infrastructure projects or construction projects. Moving on from the market evolution. Now in terms of the supply-demand, you will see, of course, we spoke about the market, which is around about 1 million tons by the end of 2023. In terms of the supply side, we are the only integrated s- player. Meaning we are the only ones who produce clinker, and therefore, the rest of it is satisfied by either imports or grinding station players within the country. The total active grinding capacity, in fact, does exceed the domestic market. Like I mentioned earlier on the.
A lot of that is in fact purposed for exports. A lot of that, the red bars, in fact, are servicing the export markets, particularly Eastern DRC. Maybe the one thing I can emphasize here is, I mean, this chart is the fact that we therefore continue to remain a clinker deficit country. The amount of clinker in the country is not enough to support the cement requirement. In fact, a lot of it, our competitors are importing clinker to service their market share. One of the things that we have really worked on very intentionally is to increase or enhance the proportion of the exports in the market. It's around about a quarter of our total sales.
Most of this is going to Eastern DRC, actually almost all of it. Like I said, in the earlier slide, there's a green shoot in terms of a potential new market, which is Burundi. We should be seeing that also contributing to our export sales going forward. We're very excited at Burundi because we have the best delivered cost. The Bujumbura, which is the capital city of Burundi, is only 100 km from our plant. As soon as those, you know, the teething issues and the, you know, and the route to market, at least as the borders have opened up.
As soon as we really have a foothold there and they're able to raise the dollars to purchase from us, then we should see this bar going up a little bit on account of Burundi. Which is good because it helps us to diversify. As the competition intensifies in the domestic market, we will be creating a new outlet in which we are very much more competitive as well. In terms of route to market channels, we have quite a diversified route to market channels, made up of, you know, the retail side.
We like to split it a bit more rather than just saying retail because they're really different animals at the end of the day. You've got the distributor, then the wholesalers, who are the bigger guys. You've got the smaller retailers and what we call micro-retailers. We also have construction, concrete product manufacturers, and exports I discussed. We are quite focused on growing this pie and strengthening our presence there in terms of the smaller retailers and the micro-retailers, because we feel that it's more solid, you know, when with intensifying competition. We are doing this by, you know, various initiatives, including digital solutions for the last mile, things like e-commerce.
We are doing this by doing things like, you know, partnering, standing in for them, those small retailers, you know, in discussions with their banking partners, so they can get working capital financing, and the like. This is really important for us in terms of to grow it and to consolidate it and to solidify it going forward because it's more reliable in a, in a, in a highly competitive environment.
That's the focus area. On construction, we are quite strong there as well. In fact, a lot of the big projects, including the new Bugesera Airport, which maybe some of you may have heard about. It is an airport which when complete, will accommodate about 14 million passengers per annum.
It's being done in 4 phases. The first phase is just under 2 million passengers, and the total cost when it's all complete will be more than $1 billion. This is one of those where, you know, we've locked in as a, we are the key supplier at the moment. We're in phase 1. It's in phase 1. For the volume there alone, you know, over just slightly less than 2-year period is close to $100,000 just from a single customer. There is, that is one of the areas where we are really focused on. We are doing other...
We are strengthening our offering there, including technical, you know, discussions and giving them solutions on various aspects, including the product itself, but also mode of delivery, be it jumbo bags or bulk and so on. Most of our bulk is actually within the construction.
Bulk today is around about 7%, but growing as the market becomes more and more sophisticated and as more and more of these major projects come through. That's the road to market channels that we are focused on, quite diversified, as I said earlier on. Coming to costs, the picture is similar to what you've seen from the other countries in terms of general split, with the big buckets being heat cost, electricity, coal, and alternative fuels.
That's a very big chunk of our cost. Distribution, as you can see there, is about 17%. We're taking a number of interventions to, you know, to tackle this area and make sure that we are as efficient as possible. This include optimizing the kiln performance through execution of critical projects. These projects are important because they will be able to run the plant at an optimal capacity. When you run it at a higher capacity, then it means your unit metrics, your heat cost per ton, your electricity cost per ton, and so on and so forth, are gonna come down.
We have completed some, but there is a number. There's 3 specific ones. The raw meal, the limestone dryer, the raw meal fan, and the cooler retrofit, which are then the next areas that we need to extract a value from, in order to not only increase our capacity, but also at the same time, bring down our costs.
Further automation, because, you know, when you automate the plant, it means your controls are much better, and you're able to run much more efficiently. Clinker factor reduction initiatives. We've done a very good job here so far, and you'll see it in one of the charts coming up. There's still some, you know, some effort we are making to see, you know, how much further can we go.
Some of these include R&D initiatives, just really looking at some new materials that we can utilize, including, I think, like in South Africa, we might... and Zimbabwe also, the whole topic of calcined clay and so on and so forth. We are doing R&D on both extenders and also on grinding aid, which are good for cost and also good for carbon footprint, i.e., decarbonization.
Alternative fuels, we are around about 10-15%, but we have a roadmap to invest a little bit there and grow the substitution rate much higher. This one is also very critical. We use coal at the moment as a base fuel for heat, but we are also we're using alternative fuels, rice husks.
We started using coffee husks, and we use palm kernels, all coming from the region within Rwanda, but also Eastern DRC and some of it coming from western Tanzania. On logistics cost optimization, this is a factor of two things. One is the truck turnaround, and the other one is the price of the transport itself. To optimize the truck turnaround, we are looking at various things, including just improving fleet management, digital solutions. We have a good transport management system that is linked to our ERP, but we are looking at how to introduce digital solutions so that we can track the trucks, you know, that much better.
We've also rolled out a road safety program because a structured road safety program, because we believe that there is a direct link between safety performance on the road and costs, you know. This is really quite an interesting area for us. Overall, we have what we're calling a cost savings program, because we believe that if you want to succeed, you must take a project approach, whatever the topic is. We are taking that approach on this topic as well, so that we can identify the, you know, the various areas and really drive them systematically. In terms of risks and strategic levers, production challenges and capacity shortage.
Here is execute the response strategic lever is to execute our preventive maintenance program effectively. I also spoke about the three key projects that we're gonna be undertaking going forward. On rising input costs, I think we have touched on all of this. Cost savings, clinker factor, and plant performance. On repatriation, the response here is enhancing export sales.
As you saw earlier on, we are at about 25% today. In fact, with that, we are able to build foreign currency cash because we have converted our debt to local currency. Therefore, the requirements on us on foreign currency are much lower than the inflows that we get from the sales through exports.
Then in terms of dividends, we also expect a lot of the investments that we will be making going forward. We've got a very good balance sheet, we can leverage it and be able to, you know, execute those projects. That shouldn't also impact on dividends, dividend repatriation back to the group. In terms of regulations, we have a very strong and close engagement with various stakeholders. In fact, as you may know, the government of Rwanda, through a very, several bodies, are 49% shareholder. We've got a very close collaboration, and they are helping us in terms of, you know, engaging with the different bodies.
We engage the communities, we engage the local leadership, we engage the national leadership, environmental management authority, and so on and so forth. This risk of regulation changes is also helped by the fact that Rwanda generally has a very stable governance and a very predictable environment. You've probably seen various rankings to do with ease of doing business. You know, Rwanda tends to come, you know, among the top in Africa. This is one of those things that is really useful in terms of local environment. On skills, we are working very closely on skills development and the focused succession planning.
Now on the capacity evolution, which I'm sure is a topic that all of you would be keen on, because in Rwanda, we've generally with the results that you will see, we have done this by remaining sold out. This has been our strategy, you know, to make sure that we sell everything we can produce by putting it on export or putting it on the domestic market. In 2022, we have moved from 64% to 71% in terms of production level versus what we consider to be our benchmark capacity. We added 7%. By 2025, we are hoping to reach 100%.
I'm happy to just share that the raw meal fan upgrade, which is this additional 4%, and the cooler retrofit, which is this additional 5%, we should tick those ones off this year during the next shutdown coming in November. The remaining step change therefore will be on the raw meal drying solution, which is a project that needs, you know, 2 or so years. On this, we've done everything in terms of preparatory work, the, you know, the process of tendering. There's 1 or 2 steps that is pending. I'm sure we'll get on with it very soon as well. Yeah. This is the progress on the cement equivalent capacity improvement.
In terms of debt, we have transitioned from a net debt position to a net cash position in 2023. You know, again, speaks to the, you know, much strength in balance sheet and a very healthy cash position in the company. Of course, all the debt is without recourse to South Africa. We anticipate to extinguish the debt by financial year 2024. The good news, first dividends were declared and are payable at some point before the end of this month or maybe early April 2023. I think Brenda should be speaking to that one later on. In terms of key takeaways here, externally, again, just to summarize, a very good recovery from, you know, after COVID.
You know, we forecast a growth in 2023 of around 6%. As I said, CAGR growth of more than 10%. Demand is supported by manufacture ability to recover, healthy project pipeline, good export market, and all these initiatives that I don't want to repeat. We just spoke about them on costs, route to market, carbon footprint reduction and plant improvement. Going forward, in terms of financial impact, the volumes in FY 2023 will be expected to be flat because of a kiln shutdown that happened in the second half.
However, we made very good progress in terms of price increase, and we expect our price increase compared to the previous year to be in the region of 14%-17%. That should show in the results. EBITDA margin should be within target, 28%-32%. Of course, I did mention the dividend declared, out of which the group should be getting around about ZAR 80 million after taxes. That is Rwanda.
Thanks, Albert.
You're potentially looking to exit Rwanda. That seems to be interesting. I mean, Rwanda seems to be structurally the most appealing market, and you've got opportunities in export growth, dividends beginning to flow, stable government, and a large contributor to the group EBITDA. Why would you want to move away from this market? Why is there a specific focus on the lower end of Southern Africa, as opposed to a very appealing Rwandan market?
Yeah. I'll take it. Don't be confused with the now and what is coming. Cimerwa has 12 years life of mine. That's number one. First of all, that plant, to secure its long-term viability, needs to find new limestone reserves. Those are not in Rwanda. Those are in the eastern DRC. There's a lot of tension, certainly at the moment, between both countries. From experience, to have a limestone reserve disconnected distance-wise, especially politically-wise, which you keep is a key risk going forward. That's number one. Number two, there's quite a lot of movement within the region. Quite recently, there was a new clinker facility opened in the, call it, the southeastern part of the DRC by a Chinese investor.
They are building a grinding station in the Rwandan market, there will be more capacity built in a growing space. We know that Kenya still has ideas of building new clinker capacity. If you wanna be a player in that region, you need to open your checkbook, you need to start investing so that you have a strong regional East Central African presence, right?
When we went on our international expansion, that was originally the idea, that ultimately you end up with a very strong regional network. What we've seen now is both due to the financial restraints that we have as well as human capital restraints that we have, and the experiences that we've gained from projects in Botswana, Zimbabwe, Ethiopia, DRC, and Rwanda, that we are de-risking our cash flows by focusing on Southern Africa.
That means that Cimerwa, that's why I said in my opening statement, sooner or later, will fit better with someone who operates strongly in that area. That's why we are open for conversations right now. If we wait too long. This is a typical thing. If you wait too long, you know, you might become marginalized because people will start to make their plans without you.
For Cimerwa, I'm speaking Cimerwa, where Albert was the CEO, that company needs to think about its future. They have a vision to be a significant player or leading player in the Great Lakes region. That's the Cimerwa vision. That means partners that are willing to finance that. We, at this moment, are not willing to write out a check for $200 million to build a new cement plant. Does that answer?
Any other questions from the room? A little bit, I've got one or two questions online. Please talk through the electricity supply and stability of this, and I think we've chatted a little bit about the limestone life supply, so we probably don't need to cover that again.
Yeah, yeah. Thank you very much. On electricity supply, it's been fairly stable, and the government actually has a number of projects. Some of them are, you know, A lot of renewables projects. There is quite a number of projects that are coming onto the grid. In terms of supply, over the coming years, we don't see a major issue if these projects are executed well. Some of them are based on the gas on the Lake Kivu. As you may know, on Lake Kivu, there is methane gas. There is a very big project on power coming from there, and a number of others that are either coming on stream or gonna come on board very soon.
Thanks, Albert. I've got one other one coming from online now. How big is the Burundi market opportunity, and what has changed to open this market?
What has changed in the Burundi market is basically, let's call it, you know, a thawing of political relations. As you know, there were challenges between the two countries, but we are very happy to note that, you know, progress has been made, and talks have, you know, engagements have been made, and the borders have been opened. Just the same way that the Ugandan border has also opened up. It's basically improved relationships between the two countries.
In terms of market size, Burundi, and I have to say maybe has been constrained by supply. Perhaps the market size is understated, but it's in the region of perhaps half of the Rwanda market 500,000 tons or also, but it's, when the supply improves, that's when you will see, you know, the real market size.
Great.
Yeah.
Thanks. I have no more online questions. If there's nothing else in the room. Thank you very much, Albert. Oh, there's one more. Sorry.
Can you talk about the cost of your power and the cost per megawatt? I don't know if you're gonna have a slide later on how the regions compare, you know, in terms of unit costs, especially when you talk about the ESG, whether it's power costs or water costs or that or distribution costs. Will you be talking about that later, leave it for then? Yeah.
We don't have a specific slide with electricity per ton and what are the tariff costs and stuff like that. Delon, I'm counting on you that you actually know more or less the different areas. If you could cover it when you touch upon your decarb projects, please.
Good. Anyone else? No. Well, thank you very much. Thank you. We'll move on to Delon now. He's gonna chat to us about very topical things at the moment, decarbonization. Thanks, Delon.
Thank you. Okay. Still good morning. Good morning, everybody. Let me get into our decarbonization update, which we came out last year and, you know, get some feedback on. I think I'll start with this slide. It comes off the back of our November 2021 TCFD report, where we put out in terms of what are the enablers for our decarbonization strategy. I think what's important also to highlight at this point is, over the past 12 to 18 months, there have been various forums, the World Cement Association, NBI, more closely to South Africa, that have been talking about decarbonization. The NBI initiative specifically looked at decarbonization from a South African context.
What has been very clear to come out of that, and it's probably still going to be published as well, these enablers are not unique to us. Where the difference lies is where the different levers are more important than others, and it's very region-specific and close to the market dynamics. The enablers remain the same, be it within our industry or within the country as a whole.
Throughout the day, you've been hearing about clinker factor reduction as being a very key lever for us within the South African context. Just to provide some color on what is clinker factor reduction. Obviously we make our product, which is clinker, and it has a certain CO2 profile. Now, the best way to absorb that CO2 is to add what is called supplementary cementitious material. Now, why are they so important?
One, they usually have a lower CO2 footprint. Two, they display very similar cementitious properties. It's an ideal constituent for us to drive clinker factor down, hence such an important lever for us. In this space, we've spoken about the use of fly ash, which remains a key lever. In Rwanda, we use pozzolan, which we have access to, very unique to Rwanda, a big plus point. You'll see a lot of the initiative has been very much focused in Rwanda around that. One of the newer focus areas that has gained momentum is what is called calcined clay.
Essentially, it's taking a raw clay, putting it through a thermal process and producing a highly reactive product, which has very similar cement properties, but a lower CO2 footprint and can be produced at a lower thermal energy input, talking to the cost line. clinker factor is a key lever.
If we move on to electrical energy, we've spoken about it. Renewables has to be part of the mix and my colleagues have highlighted the various initiatives. Over and above that, we're also looking at in terms of our normal asset management strategy, how do we go about replacing older, inefficient equipment with more better energy efficient rated equipment? This forms part of our usual maintenance plan and will continue to be a focus.
You see there, backup storage, and just to take it back to the Zimbabwe scenario, where we spoke about the fact that we need to put a solar PPA. That PPA also has backup storage included in it, which makes the potential tariff that we've got even more enticing. The fact that we would be in a position to actually run our plants for about four hours to ride out power outages.
Very unique and probably one of the first ones regionally, if I can say that. On thermal efficiency, alternative fuels, again, touched on earlier. It's about making sure our kiln lines, which is the heart of our engine, runs optimally. The amount of energy we put in, we absorb it as best as we can.
The better we do that, the lower it will be our impact, let's say, on a ramp or gigajoule basis. Moreover on that is how do we move away from our dependency on coal? Now, again, within the Southern African context, doing that in a responsible manner. The term that's being used, the Just Transition approach.
It's not only unique to South Africa, it applies to us as well. Here the focus, I would say, twofold. Refuse-derived fuel, which is a fuel that's processed from a waste dump into a very high calorific value fuel, and also tires, which is abundantly available in the South African region. Big focus areas. Moreover than that, in terms of thermal efficiency is to embrace the fourth industrial revolution, the whole use of AI.
At a very basic level, we do have what is called high-level control systems. It's been part of cement plants for close on 20, 30 years. It's taking it to the next level. It's not something unique to us, but it's something that we can build on. Training and development, absolute must. It's been a big focus area for us over the past 12 months, and we'll continue to do so. OEE, again, hot topic for us.
It is something that we've been very deliberate on over the past 2 years, and we've seen gradual improvement. All this means is running our plants at its design output and at a benchmark availability. That's easier said than done, 'cause you see the issue of power supply. We've been affected in various ways, some more so, some less.
Zimbabwe, for sure, has been the greatest impact, twofold on power supply, so power quality, power dips, and also power outages. That's significantly affected Zimbabwe. In the South African context, yes, we have, power quality as well has also started to form part of the play.
This also talks to the performance levels that my colleagues have been talking about. In fact, with all the interventions, we've been able to mitigate more substantial downside performance, even though we've had the power issue. Again, talks to the initiatives and what it means for us. Those are the enablers. Let's talk to our ambition. This has been defined, like I said, back in 2020, 2021 when we launched TCFD, they remain unchanged.
Our target up to 2025 is to get to the 680, which would be a 10% reduction, and to get to the 550 by 2030. We've already started that process, but where are we tracking? At the bottom there, you can see the year-on-year performance. It's very clear to see from the 756, we ended off FY 2022 at the 723 mark, and this year we're probably going to be slightly better.
Now again, given the background of all the issues we've had operationally, power supply, that's actually a very good performance. Factor in what Mokate highlighted earlier, the portfolio effect, the shift away from retail, 'cause clinker factor is a big lever in this. The fact that we can still show sustained levels of performance talks to the initiatives that we've been doing.
The targets remain unchanged and we're on par for that. Let's unpack a bit of the CapEx plan, and again, mentioned previously. I'll start within the South African context, right? 'Cause that represents roughly about 60% of this CapEx plan that we talked to, of which a big portion refers to the calcine clay work that's required specifically for the Western Cape.
We've initiated that project, but we've been very circumspect and prudent in terms of how we move forward, and we've been focusing on ensuring that the resource that we have is adequately validated, and also to look at options of how we can improve and get access to other resources.
We will focus on that and probably bring it to some sort of conclusion within the next three months and then move into the next step for calcined clay. In terms of coal substitution, again, very specific to the Western Cape, we've already initiated our project that will be commissioned end of FY 2024.
That will enable us to move from tire substitution, current levels of between 5%-7%, to maximize that to 15%. That will drive directly down to our Rand per GJ at the cost line. Rwanda, Albert just touched on it. There's, let's say, two of the bigger projects that make up the Rwanda CapEx. The one involves a clinker cooler retrofit, which is already part of the mix and in the play and will be commissioned, let's say, latest Q4 FY 2024.
All that is gonna bring us better efficiency of the cooling line with some better availability, which will translate to some better output. To take that plant up to its nominal capacity, so full capacity up to design, we do need to initiate the bigger project around the limestone dryer.
Our approach, we first bed in all these smaller projects, probably move out the limestone dryer to around FY 2025, give or take there. Still, a very important part of the mix. We've also already invested up to, let's say, FY 2022, FY 2023, in terms of clinker factor focus, the use of fly ash, the use of pozzolana, specifically in Rwanda. That's already in the play. We are ready to transcend our performance on clinker factor there. We are able to handle more fly ash.
It's just a question of the availability in the market. In a similar vein, Chrissy mentioned fly ash in Zimbabwe. We've done a phase 1 that will probably look at about 5% use of fly ash within our cement mix, but the next phase is to move and transcend our product portfolio as we move from what we call the CEM IIs to CEM IVs, and that will really drive benefit, and as you saw, the capacity impact on the slide Chrissy showed earlier.
In general, across all our regions, we spoke about electrical energy, the normal programs in play to move towards more energy efficient equipment. That in all probably encompasses what our plan was. We put out and we are still tracking with most of it, is just shifting and adapting to the environment in terms of timelines.
One of the things that Roland started off is about value accretion. As much as we are focused on decarbonization, these projects are able to stand on their own two feet. I'll highlight a few things here.
Firstly, it does talk to reducing our variable cost, and simply that is supported by a lower thermal energy cost, 'cause you use a cheaper, let's call it alternative coal, cheaper coal, or you use a cheaper waste fuel, and that drives directly to the variable cost line. Moreover, the lower you push your clinker factor, so for the same clinker, you can produce more cement, again, impacting the cost line. O&M, the better we run, the more efficient you will be, et cetera, et cetera.
What this table at the bottom was trying to illustrate and taking some of the projects is, what are the impact across those four levers. I'll just use one example, being Calcined Clay. For Calcined Clay, specifically for the specific operation in Western Cape, it has a potential to improve clinker factor by 15%. Moreover than that, it will reduce our thermal or impact our thermal efficiency by 10%.
Again, like I highlighted, it's all about being able to use Calcined Clay that requires less energy input, so a positive contribution to our thermal energy cost. Also it adds to capacity. You see a similar vein across all these projects. The key thing to highlight, the payback years. All of these projects range between a payback of 3-4 years.
The other key thing to highlight is all of these projects, like I say, remain value accretive without factoring carbon tax. We all know the carbon tax trajectory we sit on. If you add this to the project, it makes it even more attractive. Lastly, we have this plan, but like I said, we have to adapt.
Two key things that have come up, let's say in the, in the past 12 months, we spoke about expanding our blending capacity. We see an opportunity, we've initiated it. A lot of that CapEx spend has already taken place in FY 23. We will commission, let's say, mid this year. Again, this is adapting to a changing environment. Calcined clay in that original plan was pushed out towards the outer years, closer to 2030.
Based on what we've evaluated for Zimbabwe, we've seen the need to bring it forward, and that's what we've now initiated. All in all, on track to achieve the 10% reductions within the CapEx plan, if not better, hopefully. That's it.
Thanks, Delon. I have no online questions, so you did a great job.
We had a bet.
Is there anyone in the room?
Okay. I'll try and address electricity price. If I look at Rwanda, roughly, in US cents now per kilowatt hour is around $0.11-$0.12. Zimbabwe somehow fluctuates. It's very difficult to put a number to it. Back in the day, when it was on a U.S. basis, it was close to $0.10, give or take. South Africa is very region specific because we've got different municipalities. Very difficult to give you 1 number. Yeah. That's where we're looking at energy costs.
Roughly in South Africa, like in U.S. dollars.
I would say the big plants, I'm gonna put it South African rands now. Remember, it's a blended because we have maximum demand charge as well. Let's say around ZAR 0.80-0.90, give or take. If you go closer to the metros, then you start going into the upper ZAR 1, give or take. Coastal you are-
Eighty.
Yeah, 80-90 Rand cents per kilowatt hour. South Africa is still on a lower trajectory in comparison to what we see outside our borders, but catching up very fast for sure.
Maybe just a question on whether you have any insight on what your competitors in South Africa are doing from a decarbonization point of view, and maybe how do you think the competitive landscape changes in the next three, four years because of it?
Competitive, very difficult to say, but back to my earlier point of the studies that we've been involved in from a South African perspective, I think we see very similar trends, very similar focus areas. Internationally, very much aligned to what we are focusing on. Sorry, the second question.
Just where the competitive landscape changes.
For sure. I mean, you've seen the input cost pressures are not unique to us, and they will be forced to up their game, move towards the space that we're focusing on, decarbonization, and I'm sure there are aspects that they are focusing on as well.
I have my mic, yeah. Good, thanks. If you look at what you hear, you pick up. I recently picked up an article from one of our competitors feeding tires in their clinker plant, very similar to what we're doing in De Hoek. I know that one of our other competitors is putting out in the market that they have a low clinker factor.
They're working on the same levers. We had one competitor saying that they had the greenest cement in the market. Well, hey, that was based on imported clinker. We sort of intervened and said, "You know, that's foul play." What I wanna say with it is that, you know, all these things are not rocket science. Everybody knows that.
What is important is that the industry, through the industry body, has a dialogue with the government when it comes to the utilization of waste. That is what is specifically happening now in the... call it the inland area, where you have most of the players, where we're trying to come to an agreement with the government who's having a problem with tires.
We say, "Look, we can help you with that problem, but you need to help us with the CapEx investments that are coming with it." There are dialogues ongoing, and I would say the landscape will change. If you look at, for example, Europe, and it's a matter of time probably that we get to this, maybe it's a bit further away, but your lowest clinker factor and your lowest carbon footprint becomes your competitive advantage.
Also in, also cost point, but also towards the customers. You know, UK, areas around San Francisco, even New York, they're changing building codes around this. That's still a long way out here.
Thank you. You touched deeply on carbon tax. In light of what you're doing in terms of your decarbonization strategy, what is the impact of the current carbon tax trajectory on the business, or PPC as a whole? You know, are you thinking about sensitivity analysis, or the like? Maybe give us some numbers. We'll come back.
If only that carbon tax was wisely used, we wouldn't have this. Look, Elan, currently still the impact is relatively mild. The trajectory is scary. If you just take the trajectory of the South African government. You know, I cannot imagine a scenario under which that will come in play, because then we would be pricing ourselves completely out of the market.
I do think that as the years progress, you will get the announcements from the treasury that it will tone it down. The overall trajectory is up, and that's why we believe that ultimately we need to be a leader in our lowest clinker factor or lowest carbon footprint, as that will pick up going forward. It will become a competitive element.
Could you maybe tell us what that trajectory is? I know you say it's something that will come into play.
Okay.
Maybe-
Let's put it in terms of a variable cost, right? As a %.
Percentage.
At the current trajectory, we're sitting, let's say, between 1.5%-2%, right? At the current rates. With the proposed rates, that 1.5%-2% goes up to 3%-6%. If the proposals that's being currently made take into effect in terms of allowances, that 6% jumps to 20% of the variable cost. Massive impact, but it cannot happen.
The industry wouldn't be able to sustain itself. As it stands, within the current model for carbon tax, we're looking at moving from the 1.5%-2% up to a maximum of 6% by 2030. We are going to engage to make sure the current model is sustained. The power's supposed to come back on, if there are no more questions, thank you to them.
Appreciate it. Brenda, you start. Do I need to speak in the dark? We come to the really fun stuff. No. They put us in the dark. The hard facts, the numbers. Thanks, Brenda.
Right. Just afternoon, everyone. Let me just maybe show you. The format is obviously different to the various other presentations you've been through. I'll first take you through how we manage the business, the leverage and the cash flow update, capital allocation and capital structure, which is important. I'll end off on costs and then just take some key takeaways. Right. You saw this right up front with Roland van Wijnen, but I'd like to maybe just emphasize a couple of points 'cause it's really important to understand. We refer to this SA Obligor Group. Let me just stand over here for a minute. Just to be clear, this is the entity, this entire entity on the left here, that basically borrows from the South African banks.
Each and every entity in that group stands surety for the obligations of that group, and hence the naming, dubbing SA Obligor Group. What it does is, it gets the dividends in from our internationals, and it uses those dividends historically to assist in the de-gearing over and above the EBITDA generated from its own operations. Going forward, it will support dividends to PPC or other distributions to PPC shareholders. It's the Obligor Group that determines the size of the dividend to, or the distribution to the shareholders based on its leverage. That's why we consistently talk about our target leverage or our optimal leverage of 1.3-1.5 gross debt to EBITDA. That allows dividends to go to shareholders.
The dividend flow that comes in this way also boosts the return on invested capital, which we'll come to just now in terms of how we measure ourselves. Just looking at Zimbabwe quickly, a few important takeaways. We've consistently told you how bad or difficult the hyperinflation numbers are, and they haven't changed. We manage this business in US dollars, parallel rates, and our key focus areas are cash flow and EBITDA.
That's what we focus on, and obviously extracting that cash flow out of them as consistently and regularly as we can. In terms of managing its performance, it's again, we manage on cash flow and EBITDA because the return on invested capital is completely distorted by the hyperinflated balance sheet. In Rwanda, it's more normal, if you like, in terms of how we manage the business.
Very much like we manage the Obligor Group. We manage in ZAR, and we manage on its ROIC, and its ROIC is, it really exceeds it quite nicely. It makes very, very good returns on invested capital. I'll say it one more time, it's been said before, but both here and there, it's mentioned that all funding needs will be funded in country and have no recourse to PPC's balance sheet. I'm not going to.
I think that all the points made on the top of the side here we have talked about. Just moving forward then to the gearing. Here, the slide indicates quite nicely how we've de-geared over the years, and we expect to end the year at sort of between ZAR 725 million and ZAR 775 million.
You'll notice this is net debt, and the reason we talk about net debt now is we're starting to accumulate cash in the business, and we Or the SA Obligor Group, okay? This is that SA Obligor Group slide one more time. We're accumulating cash 'cause we don't want to de-gear anymore.
We've got a fixed debt repayment profile we don't actually want to early repay. We're quite happy with our gross debt as where it is and that's why we talk about net debt here. Strong cash flows support this reduction of debt historically, as I've said. It's still been the SA Obligor Group is still contributing despite the weaker margins.
We do see ourselves hitting that target of 1.3-1.5 gross debt number by the end of the year, which will allow distributions to shareholders. Right. We've spent some time on the CapEx, and each entity has talked about their own CapEx, and this perhaps just summarizes some numbers associated with that. In terms of... On the next slide, I'll explain the definitions of these, what we talk about sustain, optimize, compliance CapEx and expansion CapEx.
In terms of the three buckets, just in that sustain, optimize and compliance, South Africa, we see leveling out at ZAR 282-ZAR 310. That's slightly below the ZAR 324 that we spent in FY 2022. Zimbabwe gradually reduces to about between $4 million and $6 million.
Rwanda normally in this space spends between ZAR 40 million-ZAR 50 million. There we go. You can hear me now. That's it. Hope you heard all of that before. In 2024 and 2025, I think Albert touched on it, Delon touched on it, that number's going to increase by about ZAR 170 million for that cooler and at Rawmill, that Rawmill fan that you heard about.
On the expansion CapEx, most of that ZAR 40 million, ZAR 50 million is the Highveld blending plant. Most of that, if not all of that, is the Calcined Clay project in this part of the world. Rwanda, you've heard about the Rawmill drying solution, that's mainly that bucket over there. Zimbabwe, Calcined Clay and the fly ash storage. Just again, this is...
This slide really focuses on what we call below the line EBITDA cash flow items. Just two, that's the CapEx. The other big one is obviously net working capital. We do see our net working capital do a little increase at the end of this year, somewhere between ZAR 60 million-ZAR 80 million, and that's really just your stock build-up.
We really want to optimize our kiln shutdown periods, and we're just building up some stock at the end of the year. Tax is always a difficult one. We have that really alarming effective tax rate. We really are planning to get that down to a sort of a steady 31%. The way we structured, just to remind you, is, I mean, there's a good and a bad side of that higher rate. The bad...
The good side is we pay withholding taxes on all these dividends, and that pops that rate up. We also have some expenses in PPC Limited that don't get deducted because it's largely a dividend-receiving entity. As I mentioned before, we are not going to reduce our debt further from where it is at the moment in terms of its normal repayment profile.
Right. Here, I think you've all seen this before, but just to remind you of our definitions for capital. We have what we call compliance CapEx, and that is relatively easy to understand. Stuff we have to actually spend in order to comply with regulations and our own fixed asset policy. Maintenance is really just maintaining our output, without which we would either not...
It would increase our cost or decrease our output. Optimization improves operating efficiency, and it has a positive EBITDA impact, whereas expansion capital actually increases the output. Clearly, given the position we're in, it's this area that is going to require very strict capital allocation rules and debates as to the balance of that capital that's available in this bucket to distribute between expansion CapEx and returns to shareholders.
Clearly, that is something that we will look at very carefully in the sense that we've said to you before. Aspirationally, we want to get returns to shareholders going, so any expansion CapEx has to compete very competitively against that and really have returns that we believe are in excess of what shareholders expect to receive. Right.
Just moving on to the concepts that you'll probably see, maybe not for the first time, but for the first time since I've been here. You will I think we've used before the concept of a PPC economic value add. I think it's really not that different. We just believe that ROIC is probably a more used and potentially better understood term in the market, and that's what we're moving towards in terms of how we measure ourselves.
Just to summarize, it's actually not There's some nuances in the calc, but quite simply put, we take our EBITDA, we add back our depreciation, because we believe depreciation is a normal operating expense. It reflects the wear and tear on your operations, and you need to add it into your expenses.
We then deduct tax at the normal tax run rate. Then in PPC or the SA Obligors case, we add dividends to that. Obviously, that's not applicable to Rwanda. We add dividends received. The reason for that is that in our invested capital, we include the carrying value of those investments into Zimbabwe and Rwanda.
That gives us our NOPAT, or net operating profit after tax for the engineers. Then we divide that by invested capital. That number must exceed our WACC. Suffice to say, we are not there. That's one of our key focus areas. We are not achieving our WACC. We do think we will achieve it in 2 to 3 years' time. That's our target anyway. Currently, just largely below 10, and our target is over 15.
We only have three levers we can pull. We can price, as Roland said earlier, little bit, but it's not really something we control. Volumes, we're volume takers, so it's back to cost. Cost is the key focus area for this business to get back to a ROIC that exceeds our WACC. I mentioned before, we apply the same methodology, excluding the dividends for Rwanda, but we don't do it for Zimbabwe.
It's, as I say, garbage in, garbage out with a highly inflated balance sheet. Just to sum up, before I move to the next thing, is resumption of distributions is now possible, we believe. We always have to caveat nicely. What we'll obviously consider, and it's probably a state in the office, but we will consider market conditions.
I mean, just the market is volatile at the moment. We need to consider our forward-looking compliance, maintenance, and optimization CapEx. We can't stop spending in those buckets to run our assets into the ground. I'm not too worried about the covenants, but I am, because we're well clear there.
It's not that I don't care about them, it's just that it's not a concern. What we will focus on is that on a forward-looking basis, we maintain that optimal level of gearing. You will note we have moved from using the word dividends to distributions, and that's just to make sure that everyone understands that there's flexibility in how we distribute that cash to shareholders. Right. Moving on to costs then.
What, what we've tried to do here is just un-unpack the costs into its categories, just so you have a nice understanding of what the size of each bucket is and whether it's variable or fixed. At the top, is variable production cost. This is the total cost for SA Obligor in actually producing the cement on a, on the variable cost basis of that. That, you can see the size of the number there, that ZAR 2.6 billion.
As you would have heard from, I think it was Nkateko, we've contained that to 11% year-on-year increase, circa 11%, FY 2023, which is below the input cost of those things. That's the one that is driven by primarily electricity and coal and so forth. We get our variable logistics and distribution costs.
The major cost driver in that one, that's obviously variable, depending on how many tons you actually deliver to your customers. That has had a very high cost inflation this year, circa 20%. We've contained it to that circa 12%. Last but not least is what we call fixed costs and support costs.
These are really the costs that are now the sticky cost of the business that either sits at the site or in sort of admin stroke support. That has worn a sort of a 3%-5% or circa 4% inflation. Roland mentioned it, and it's absolutely right. Our focus remains on cost for this coming year. We focused on it last year. We're not going to stop.
As I said on the previous slide, it's the key lever that we can control to get our ROIC to where it needs to be. The four areas that we've identified that will get particular attention this upcoming year are those that you see there. IT, procurement, strategic marketing, and support.
Individual initiatives will be undertaken in each of those areas to further contain costs in this business in the coming year and hopefully it obviously flowing through into the future. On the key takeaways. I mean, I think I've said all these points, but just to summarize. Cost, cost, and cost. Decarbonization, you've heard from Delon, it is also a cost deliverer or a cost reduction deliverer, and it makes us environmentally accountable.
Focus on continuing that constant dividend flow out of Zimbabwe and Rwanda. One more time, finance their capital on their balance sheets, maintain our optimal level of gearing. I think that, those takeaways there then take us to where we need to be on the right-hand side of the thing, where we expect our debt to be the 1.3-1.5. We're going to keep it there for the foreseeable future, and hopefully those costs initiatives that I've now waffled on about quite a bit will get that ROE to where it needs to be. I think that is me. Right. Oh, that was quick.
Great. Straight on to questions.
Just thinking about distributions going forward. From Rwanda and Zim, it's kind of like a 6% dividend yield on your current market cap. Is there more in the SA unit as well that can be added to that? Or how should we think about that? I mean, I know you used the word distributions, I assume as something about a buyback of some sort. Maybe just your thinking around that quantums as well would be interesting. Thanks.
The quantum will be... I don't want to give you a specific number because it, you know, there's a lot of debate that still needs to go around there. The quantum is definitely a combination of what we generate in cash in SA Obligor plus dividends received relative to our gross debt, subject to those good things. It's that combination. Right.
Just maybe if you can reiterate that, flow from Rwanda. Did I hear right that it's ZAR 80 million? Is that, a, annual dividend? It was mentioned earlier in the earlier presentation, and how is that meant expected to change? I see there's obviously a bit of a pickup in their CapEx on a go-forward basis for those other reasons that you've just kind of gone through. Maybe if you can just talk to how you see that playing out going forward.
Sure. Maybe just if I can touch on the first dividend. They did declare their first dividend, and about 10.5 billion RWF, it wasn't because they hadn't been able to in the past, it was where they were constrained in the past by their assess loss. They would have lost their assess loss if they had declared dividends.
That was completely utilized by 30 September, and that's why they're now into their first dividend payment cycle. ZAR 80 million that we've referred to is 51% of that after withholding tax. We are very fixed and firm, and maybe, Roland, you can... That dividend profile, it's not a once-off, and that's why we keep reiterating that their CapEx needs to be financed on their balance sheets.
They've got very low gearing, and there's the debt capacity in country. We don't see in our forecasting period that being, stopping or decreasing significantly at all.
While we wait. Okay.
If you go back to that ROIC slide, I'm trying to understand, you know, you've got this EBITDA, earnings before depreciation, tax, and amortization. Why are you adding back depreciation?
I can go back to side. Because we are penalizing ourselves. It's penal to do so, and we think it's right. EBITDA is before you've taken the depreciation hit.
You're adding the depreciation.
Yeah, because we say it's a real cost.
It should be a deduction.
Okay, I hear what you mean. We reduce our EBITDA by the depreciation.
It's a plus, if I were you.
Okay. Fair enough.
I've got an online more, broader competitive question here. Overall strategic question. Should any of the competitors that are for sale go into Chinese hands, is there a risk that might increase the level of Chinese imports?
Sorry, can you repeat the question?
Sure. I'll have to skip that last one. Overall strategic question. Should any of the competitors that are for sale go into Chinese hands, is there a risk that might increase the level of Chinese imports?
I'm making a few assumptions here.
Yeah.
Assumption number one, we're speaking about South Africa. If any of the players become into Chinese hands, will that increase the Chinese imports? At the moment, we don't have many Chinese imports. There's a little bit coming out of the new Mozambique plant. I don't think that a new Chinese player will change the import landscape drastically.
We already have a Chinese player in the market, one of our competitors is largely Chinese-owned. Will there be more appetite of any foreign direct investor currently in the cement market in South Africa? That's a question that I cannot answer, but the level of foreign direct investment, unfortunately in the country is very low. Megan?
I just want to calibrate the size of the cost opportunity you still speak to. You say ambitions to get to the 15% ROIC. I mean, what assumptions are you making regarding sales growth? You say volumes are very difficult to achieve, price growth is difficult to achieve, I mean, what are you actually taking into account on those factors, I suppose?
In coming up with that as a target?
Yeah, the 15% number.
Okay.
I assume that's not achievable just from cost containment.
No, it's not.
Yeah.
I mean, let's start up the 15% you see there is our initial target because it just is over our WACC. Okay? That's where that number comes from. To get there just on cost is, in that timeframe is very tough. Over and above, you know, it's a high single-digit number cost cut over and above what we've done, to give you a flavor of the sensitivity.
That is achievable, you think, given the numbers?
It's with difficulty over a period.
I'm not gonna give you the exact budget for obvious reasons, but it is 3 levers. Small one on the volume, slightly bigger one on the price, and the biggest one on the cost. If you run the your own sensitivity, which you should be able to do when you have the full F's or do it on last year.
I stand corrected, Brenda, but if you just pull one of the 3 levers on price, you need about 10% above and above what we expect for next year. We have increased prices a little bit in January now, so that will have a roll on effect anyhow, over and above. On volume, it's 7.5. On cost it was 12.5.
That answers your question. You know, you cannot just do it on cost, that is for sure. You need the three levers. That's why I said costs we have the most control over, then price, and volume is what it is.
I just wanna say it's all three levers, even just little bits. Not little, but you know, a bit from each lever can get us there. That's what our estimates say as well. It's not a target that we don't see ourselves achieving in that timeframe.
Another important one is going back to what Dave said before, that we're becoming very laser sharp on a business like, for example, aggregates. Say, look, we cannot afford ourselves to have cash leakage out of a business that is actually not contributing to the core.
Yeah. This is a question just on the, whether you'll be articulating a kind of a dividend policy now that you're in a position. I know it's still early, but you know, something to the effect of a full pass-through of the, you know, subsidiary dividends and then plus X% payout of South Africa. You know, to the extent that there's, you know, no additional CapEx required. I just want to get a sense of how far you are in your thinking with respect to that.
I think our thinking has developed quite far. We definitely will be articulating the policy when we see you at the year-end. Maybe just to give you an inkling as to what's in that thinking, is we're certainly not going to. Well, all of this is still subject to the board, so this is management's views.
We certainly don't want to have a dividend policy that deals with different cash flow streams. We will look at the SA Obligor balance sheet and what that looks like relative to all the cash flow that has been generated, both from operations and dividends, and formulate a policy around that relative to optional leverage.
Definitely as well, around the cash, not around earnings, given our hyperinflation in Brazil.
I think a related question here. What happens to Rwandan cash flow when the debt is repaid?
Cash flow that I'm assuming the PPC, the Obligor receives from Rwanda cash?
I'm not sure, Rowan.
From Rwanda?
It's I think, you know, at the moment obviously you're saying that you're gonna go net positive on your debt profile. If you don't pay it all out, it's gonna sit on the balance sheet. I presume that's the question that's sitting behind this. What happens to Rwandan cash flow when the debt is repaid? if you don't-
I'm a little confused on the question. In terms of it's referring to the Rwandan cash, that Rwandan cash will be used to fund some of their CapEx.
Yeah.
The rest will come back as dividends to SA Obligor Group.
When you're talking about debt in South Africa, you've made the point already that you intend to maintain an optimal leverage level.
Can you maybe just talk to the opportunity for buybacks if the share price is still kind of where it is at the moment relative to dividend return to shareholders, assuming that the status quo remains and balance sheet is where it is today year-end?
Let me start off by saying the policy is going to determine the pot of cash, okay? That's available as I just said right now. Whether we apply that pot of cash then to a dividend or a share buyback is going to be a debate. It will be informed by where we view the value of our share at some, in some instances, relative to how we see the value of the share. If we think it's undervalued, that would be our strong preference. but definitely either, you know, that is gonna be the debate, but it is definitely on the table and that's why we consistently use the word distributions. The amount should be the same as what we would have declared out alternatively as a dividend.
I have no more questions. Roland has nothing else left here. Roland, I hand over to you to close us down.
Thank you very much. Thank you very much, Debbie. Closing us down sounds depressing. As I have one or two more slides, and then, you know, we can do another Q&A and then chat outside and take questions online whilst we're still with our online audience. Before I do that, let me first thank you for coming out, especially those here in the room, but also those of you online that have taken the time.
I was listening to the presentations and, you know, I'm passionate about this stuff. I should be. I was thinking about, you know, we're talking a lot of details on our business, on making cement, on OEEs, on decarbonizing. I do hope that, you know, you find it useful to understand and contextualize the numbers.
We do also invite you to give feedback. I was chatting outside, during 1 of the breaks. Our intention is now to have 4 interactions per year, call it. You know, 1 in March, 1 in September, just before we go into close periods, either on the back of a conference or something like this. Then 1 more focused on the financials when we do our year-end and when we do our interims.
We welcome your input on, you know, what the format should be, what works for you, what doesn't work for you, too much detail, too little detail, and so on and so forth. This slide you've seen before. I stand to this slide. If you look at the investment case for PPC, it remains a company that is performance and returns-focused.
With leadership positions in the markets where we have a presence. Botswana, Zimbabwe, South Africa, and Rwanda. Especially valid for South Africa, well-positioned to take advantage of structural growth in infrastructure demand. Decarbonization, I hope we have been able to demystify a little bit and unpack the fact that that is just a cost. No, it is having a benefit as well.
All these projects are value accretive, and they lay the foundation for a sustainable business going forward. I'm glad that I can now say that we have achieved an optimal balance sheet structure, so that we're not only having to announce that we have generated cash in order to pay down our debt profiles. We can now switch to distribution models as it was outlined by Brenda.
I hope that if you look at this part of the room, and if you have a chance you look deeper into our organization, that you see an experienced, focused, and motivated team that despite external challenges, and Brenda talking you through the numbers in the dark, is focused on performance and generating the returns. This summarizes in the last five bullet points. I'm not even gonna repeat all five anymore.
I think you've heard them. As they always say, Tell your audience what you're gonna tell them, tell them, and tell them what you've told them. I'm gonna ask you, read what we've told you. With that, ladies and gentlemen, let me open once more for Q&A if there are. If not, it's over to Debbie to close us down, close us out, or whatever she wants.
Oh, okay. I'm just checking online. There do seem to be one or two.
I mean, Roland, just maybe talk us through your plans, the commitment to the business more medium term, where your headspace is at the moment.
I have a 4-year contract that ends in 2023. As we said at the interims, we will tell you in June, where the board has landed in terms of the, of the future leadership for the company. Personally, you know, I have certain ideas in my mind. I'm not gonna tell you, because I'm focused on the now and the here, and so is the team. The moment I'll tell them I will stay, some of them might go. The moment I say I go, some of them don't listen to me anymore. If you don't mind to wait, Charles, I appreciate it.
Okay. I've got 2 other questions from Rowan here online. The big cement retailers have not been very brand loyal, particularly as demand weakened after the COVID DIY boom. Is this still the current situation?
Rowan, as we indicated, you know, the customers of the retail business are ultimately the ones that drive the traffic. We have seen the disposable income coming down, so people becoming more price sensitive. If, let's call it the major retail brands, even if they're loyal, if they start to see their customers go to other shops and spaza shops and whatever you have to buy other brands, it's logical that, you know, they need to make reactions as well.
I wouldn't personally see it as, you know, we expect the major retailers to be loyal to us or to any of the other major brands. We need to make sure that we deliver our product at the lowest possible cost and manage that premium properly.
What is important to me is that especially the large retail players are quality conscious. What we have seen, and I know this is not the job of our customers, this is the job of the regulators, but we have seen cement bags that are underweight, that are not performing. I would find it a shame that some of the good brands that we have in South Africa in the retail space are selling crap.
Is government enforcing local procurement rules, particularly with large road projects? Does imported clinker count as local after local grinding?
Unfortunately, the government projects are not massively present. You did hear when Sinoma awarded to the Chinese whole uproar, they committed to local content. If you look at the player in the Port Elizabeth area that imports clinker, they have an exemption, so it doesn't count the rule. All with all, you know, this rule is helpful, but we need to see it in practice. You're not allowed to drive through a red traffic light either. Yeah.
Yeah. We don't see any of those, do we?
Yeah, exactly.
I'm not sure this is a question. That's more one I can probably take offline just on the current production and production at full capacity. Obviously, just some detail we can iron out there.
Maybe lean a little bit on Mokate there as well. As Mokate mentioned, we have two of our kilns, SK8 and DK1, that are not operating. We can bring both of them back. If we bring both of them back, we add how many million tons of clinker?
One and a half million tons.
Divide that by 0.7 there or thereabout, you have the cement capacity that we can bring back online. The two lines that we are running in the inland, SK9 and DK2, they're running roughly at 80% OEE. We still have a bit of space there to move that to the 85%. This is just the inland area.
Nothing more online. I've done one final check, and I won't shut you down.
I appreciate it.
Nothing else. Well, thank you everyone for your time and the management team for a very informative session this morning. There is some finger lunch outside and a lot of the team still here. You're very welcome to join us. Thank you again. To the people online, have a good lunch. Bye.