Metair MD Theo Loock: R1.4bn refinancing, Turkish acquisition and SA’s motor industry
Metair is a company from relatively humble beginnings, starting life some 30 years ago supplying parts to Toyota SA – which was at that stage a sister company. Today the group produces and supplies components to all major motor manufacturers in South Africa and is itself a multinational group with operations in Europe. The company recently expanded further by acquiring a majority stake in Mutlu Akü, Turkey's largest battery manufacturer and distributor. Part of that acquisition required a R1.4bn credit facility which will now be refinanced through the issue of pref shares. Alec Hogg was joined in studio by Metair's MD, Theo Loock, to unpack those details along with the half year results – which lead to a fascinating discussion surrounding South Africa's motor industry. MD
GUGULETHU MFUPHI: Well, Metair posted a 16 percent drop in first half headline earnings per share to 120 cents. Theo Loock, the MD of Metair, joins us now to unpack the numbers further. It's good to have you with us.
THEO LOOCK: Thank you very much.
GUGULETHU MFUPHI: I take it the big news story is obviously the refinancing of the credit facility, R1.4bn, with regard to the acquisition you did in Turkey. Why is that refinancing necessary?
THEO LOOCK: I think due to time pressures at the end of last year and the confidentiality of the acquisition we had to act on the resources that we had, so we managed to get a breech facility from Absa, our bankers, and we went to the market to issue 50 percent of the acquisition cost in capital. Then we executed the acquisition. Now that we've completed the acquisition we are able to go to the market and go through a formal refinancing process, and at 69 percent of prime and a redeemable pref share at capital raise, the market supports our expansion strategy. Especially our emerging market, battery expansion strategy, and we're very pleased with it.
ALEC HOGG: It's interesting that you selected Turkey, and we've had this conversation before, but many South African manufacturers are looking outside the country. They're just 'gatvol' with what's going on here with the labour strikes and with the difficulties of doing business in South Africa. Did that motivate you at all?
THEO LOOCK: No, I don't think so. It's a part of our strategy that we say, we like this time zone – plus two hours/minus two hours. There's an opportunity for some investments in traditionally family owned businesses and it's a very strong market, especially the vehicle manufacturing market. What drove us to Turkey is that the market is two-times plus the size of the South African vehicle market manufacturing, a very strong after market, and almost 20 million vehicles, in a very strong export position. It makes us the number three [inaudible 02:01] player in the EMEA market and that's why we're so pleased with the results, from a 500 percent improvement on its first half result to the comparative period, as we turn it from a family owned business to a corporate entity.
ALEC HOGG: Likely, though, your margins are under pressure in this six-month period – significant pressure – if you have a look at the operating level. What's going on?
THEO LOOCK: Labour instability. One thing the premise that the South African automotive industry is built on, especially in the OE manufacturing side is that we want a stable production environment. We run a pool system, where the market is buffered with stocks that gives us a stable manufacturing environment. As soon as you start varying the input and especially labour availability, what happens is your planning goes out of the window, and therefore margin pressure… What it does, and especially in anticipation of strikes; customers don't like to be on the back foot all the time, so they do mitigation actions. Those mitigation actions is the building of stock, trying to put contingency plans in place, and also cash-back plans, so both before and after a strike period you are either trying to build stock or you're trying to catch back.
ALEC HOGG: Did you see President Zuma signed into law yesterday, the new Labour Relations Act?
THEO LOOCK: Yes.
ALEC HOGG: Is that going to help the situation?
THEO LOOCK: Everything that comes off regulation and structure, helps. If it's in abeyance or still being, discussed in uncertainty people, don't know what side of the coin it's going to fall. We are law-abiding citizens, so if that's the law, we manage to work with it and we are very, happy with it.
GUGULETHU MFUPHI: But obviously, the South African environment, like you make mention of, is a difficult one. Labour is one aspect. Are there any other concerns, with regards to operations here?
THEO LOOCK: I think we are very fortunate. The labour could have had a much more negative effect. If you take pre-Marikana, the number of vehicles that South Africa produced is actually less than it is today. That's because of our Government support system, the Automotive Production and Development Program. It's really buffered some of the hard, negative effects that labour could have had on the South African motor vehicle manufacturing in mind, to the extent that the vehicle production could lift to 650,000/700,000 vehicles in 2016/2017 and later we've seen new entrants come into the market. The announcement, for instance, of Hyundai coming to produce in South Africa. This is very positive news, so yes, there's negative news and labour instability is bad. This does destabilise our manufacturing environment.
It does affect operating profit, a positive a portion of the risk governance, given an overlay that provided structure, and future to the business. If we can just get back to stabilised labour environment then we should have a bright future.
ALEC HOGG: It seems to me that Government is subsidising this industry. We know that for a fact, so you've got labour instability on the one hand, but you guys are okay because Government pumping money in there. It doesn't sound fair to other manufacturers.
THEO LOOCK: We're not okay. You see redistribution in the margins that happened because of the instability and what the Government is doing is not subsidising the industry. It is protecting the industry by Import Duties. You go everywhere else in the world; we've got some of the lowest import duties on vehicles in the world. In Turkey, for instance, where we operate there's a 135-percent import duty on luxury vehicles. In South Africa, today, there may be a net with three trade agreements, it sits on import duties, and of the rebates that you can earn, through the GDP actually comes to zero protection, so all it is, it's trying to protect a very important engineering and manufacturing industry in South Africa. It is not subsidised at all.
ALEC HOGG: But why are our car prices double those of anywhere else in the world?
THEO LOOCK: I don't think the car prices are necessarily double.
ALEC HOGG: I'll give you the number. I'll show you the numbers. They are much higher than elsewhere in the world. Why? MIDP is part of it.
THEO LOOCK: No, if you look at it, it's vehicle demand and supply. Let's look at the transport quote, and what's produced in South Africa, and I think we've got very competitive prices. If you look at the entry-level vehicles, today, more than 65 or 70 percent of the vehicles that are sold in South Africa have been imported in to South Africa. What we do, is we earn foreign currency by exporting high valued vehicles, because we're competitive in those emerging markets. Structural support like AGOA Act from America that sees our vehicles exported from South Africa into the U.S. with no duties, is giving support to the manufacturing industry in South Africa, so it is not necessarily coming out of the taxpayer's pocket.
GUGULETHU MFUPHI: This support: does this mean that this industry, as a whole, isn't necessarily dying? So often, we hear about statistics, about potential job losses within the manufacturing sector. The PMI is slightly lower than what it was previously.
THEO LOOCK: We're fortunate. Manufacturing, as a sector comes from, say 22 percent contribution of GDP down to maybe 14 or 15, but the automotive manufacturing industry is 50 percent of that seven percent, and it's because of the very, strong export markets that we support. More than 50 percent of the vehicles produced in South Africa are exported. Some vehicle manufacturers export 90 percent of their vehicles, in South Africa. Everywhere in the world, there's the phenomena that vehicle manufacturing enjoy some sort of support. Mostly, its demand support in markets where they protect it from import duties and South Africa has got the lowest. I think we're one of the most competitive. If you look at the number of vehicles that you can buy on the South African market, it's come to I think about 1800 derivatives or model types that you can buy in the South African market.
ALEC HOGG: Doesn't that tell you something? For a small market to have 1800 options, it sounds like it is somewhat overtraded. For Hyundai to come and put another plant here how many automotive manufacturers do we now have?
THEO LOOCK: That will be the seventh one. There's seven in South Africa.
ALEC HOGG: For a little country, point-three percent of global GDP, there are seven motor manufacturers. Is there any other country in the world that's in a similar situation, at a similar size?
THEO LOOCK: A very important aspect that you mustn't miss, is the commodity that goes in to the vehicle. The vehicle consists of aluminium, copper, steel, and lead, and commodities cannot be transported all over the world, so it's about the availability of the commodity in the country that can be converted into the component that goes into the vehicle because we've got the commodity that's available. We still have relatively good electricity rates – maybe some improvement coming in the future. In addition, if we have a stable labour environment, we have a competitive manufacturing environment but we need to stabilise the manufacturing environment.
ALEC HOGG: We better hope that BHP do not pull out from Hillside because then we will not have aluminium and we'd have to import that as well.
THEO LOOCK: Yes, and that's what important – beneficiation – and I think that's where the Government is being very clever. If you look at the focus of the Industrial Policy Action Plan, it focuses on beneficiation of raw materials in South Africa.
ALEC HOGG: An interesting discussion. Thanks Theo, for unpacking that, from your perspective.