CAPRAL LIMITED — Annual Report 2019

Feb 25, 2020

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26 February 2020 Capral Limited (ASX:CAA) Level 4, 60 Phillip Street Parramatta NSW 2150

Approved and authorised by Capral’s Board of Directors

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18 distribution centres
Australia-wide
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Residential & commercial
construction, industrial
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Employs over 900 people
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¹ 12 months to 31 Dec 2019

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1. FY19 Highlights

2. FY19 Financials

3. Strategy and Outlook

4. Questions

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“Full year earnings in line with guidance, stronger second half profits and continuation of dividend”

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• Full year result in line with latest guidance

• Trading EBITDA¹ of $11.0m (FY18: $14.3m) and EBITDA[1] of $19.9m (FY18: $13.1m)

• 2H19 Trading EBITDA[1] of $8.6m due to savings realised from business initiatives

• Volumes down 6% on prior period with conditions stabilised in second half of 2019

• Final dividend declared at 0.5 cents per share (fully franked), underpinned by solid 2H19 result

• Strong balance sheet and net cash of $17.9m

• Margins remain tight due to competitive landscape

• Major restructure of Bremer Park facility substantially completed, realising $3.5m of savings in 2H19

• Market conditions soft in residential building sector

• Commercial construction and our key industrial markets were steady throughout 2019

• Key capital investment projects completed in 2019 to improve long term competitive position

• Safety - TRIFR² at 11.4 (FY18:13.2), improved 24%

Important Note

¹EBITDA is defined as Earnings before Interest, Tax, Depreciation and Amortisation and incorporates AASB16 impact. Trading EBITDA is presented with reference to the ASIC Regulatory Guide 230 “Disclosing non-IFRS financial information” issued in December 2011. Trading EBITDA is EBITDA adjusted for significant items that are material items of revenue or expense that are unrelated to the underlying performance of the business. Capral believes that Trading EBITDA provides a better understanding of its financial performance and allows for a more relevant comparison of financial performance between financial periods. These items are LME and Premium revaluation, one-off and other restructuring related costs that arenon-recurring in nature and including the depreciation and interest on Right of Use assets as proxy for rent.

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²TRIFR is total reportable lost time and medically treated injuries per millionwork hours.

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Channels to market (volume)

Diverse industry exposure

Volume Seasonality

Tonnes (000’s)

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13%
17%
VOLUME
46% VOLUME 46%
BY END
BY CHANNEL
MARKET
41%
37%
Rolled aluminium (via DCs) Industrial
Extruded aluminium (via DCs) Residential Building
Extruded aluminium (direct from mill) Commercial Building
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40
35
30
25
20
15
10
5
0
1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18 2H18 1H19 2H19
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Source: Capral

• 1H19 volume 10% lower than 1H18

• 2H19 volume 2% lower than 2H18

Source: Capral DC: Capral Distribution Centre

• Residential building includes additions and alterations

• ** Industrial includes transport, marine and other manufacturing sectors

• Full year volume down 6% on FY18

• Impacted by slow down in residential construction

• ~83% of total volume is Extrusion

• ~17% of total volume is Rolled (sheet & plate)

• Imports remained high throughout FY19 and combined with surplus domestic capacity continued to impact volumes

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Annual Dwelling Commencements[1] (‘000)

2019

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250
200
150
100
50
0
2012 2013 2014 2015 2016 2017 2018 2019 2020
(e) (F)
Detached Housing Multi-Res Low Rise Multi-Res High Rise
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• Capral’s volume in the residential market is mainly aligned with Detached and Low Rise Dwellings (shaded green in adjacent graph)

• Residential commencements have declined significantly through 2019

• Latest estimate¹ 170,000 starts for 2019

• 24% decline on prior year

• Multi-Res High Rise showing the sharpest decline, estimated 42% down in 2019, however Capral’s participation in this segment is only modest due to predominance of fully imported windows

• Multi-Res Low Rise estimated to have declined by 27% in 2019

• Detached Dwellings declined by an estimated 14% in 2019, with all major states in decline

Future

• Overall market is forecast to remain relatively flat during 2020 with growth expected in detached and low rise from mid 2020 onwards

Source:

1) BIS Oxford Economics - December 2019

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Kunzea House, Springvale, NSW Hume Splash Swim Centre, Craigieburn, VIC Denmac MHM Prime House Office Tower, WA

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Total Capral Industrial Volumes (Index 2012)

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120.00
100.00
80.00
60.00
40.00
20.00
-
2012 2013 2014 2015 2016 2017 2018 2019
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Source: Capral

• Marine sector strong – commercial ferries and defence

• Transport slowed

New Truck and Van builds¹ (‘000)

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45
40
35
30
25
20
15
10
5
F²F²
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
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• Manufacturing and general fabrication steady

¹ Source: TIC (Truck Industry Council of Australia) (Prime Mover Magazine)

• Defence – Government has committed $195 Billion over next 10 years (see page 18)

• Cladding –Capral introduced Smartfix, a patented, tested and certified solid aluminium cladding system (see page 18).

• New truck and van builds down 9% from 2018 record year, 2H19 down over 20% from 2H18.

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Commercial Ferry, Bajamar Express “Veiled” by Britt Mikkelsen Maxi-Cube trailer built by MaxiTRANS Henderson, WA Sculptures by the Sea, Bondi, NSW Ballarat VIC

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2019

• Capral has an estimated 26% share of the Australian aluminium extrusion market

• Import volumes and share of market increased in FY18 and maintained high levels through FY19. Positive anti-dumping outcomes in 2019 should see imports begin to fall

• Excess domestic extrusion capacity remains

Future

• BIS Oxford Economics and HIA predict the Building Industry to pick up from second half 2020

• Imports should decline with the higher duties and activity of Border Force enforcing the Anti-Dumping measures (see page 18)

• Industrial markets starting to improve with infrastructure work, defence and general industry strengthening

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Tonnes PA'000 AluminiumExtrusion Market Sales Volume
200
190
186 186
179
180 173 173 175
161
160 156
140
120
100
80 Imports (China & SE Asia)
60
Capral Extrusion Production Volume
40
20 42.2 42.8 45.7 45.9 53.8 52.7 50.2 46.6
0
2012 2013 2014 2015 2016 2017 2018 2019 (e) 2020 (F)
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Source: Capral

• Adjusted down in 2019by estimated reclassification volume dueto Border Force compliance activities

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“Earnings improve in second half, in line with guidance, and above same period last year despite lower sales”

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1. FY19 Volume 6% lower than prior year. 2H19 volume 2% lower than 2H18

2. Sales revenue reduction driven by lower volume and reduced sales price due to lower LME

3. Margins continue to be under pressure due to imports, excess local capacity and lower utilisation

4. Restructuring will deliver annualised savings estimated at $8m of which $3.5m was realised in 2H19

5. AASB16 EBITDA impact of $16.7m includes property rent offset of $16.2m

6. Finance cost higher due to increased use of Letter of Credit facilities for imported rolled products. Finance cost includes facility fees

NOTE	1H19 2H19 FY19 1H18 2H18 FY18
Sales Volume('000 tonnes) 1	26.8 30.0 56.8 29.9 30.6 60.5
	$m $m $m $m $m $m
Sales Revenue 2	201.2 217.8 419.0 222.6 232.5 455.1
Trading EBITDA¹ 3	2.4 8.6 11.0 6.9 7.4 14.3
Restructuring and one-off costs 4	(6.4) (0.3) (6.7) - - -
LME Revaluation	(1.0) (0.1) (1.1) 0.7 (1.9) (1.2)
AASB16 Lease cost reversal 5	8.4 8.3 16.7 - - -
EBITDA¹	3.4 16.5 19.9 7.6 5.5 13.1
Depreciation/Amortisation
- Owned Assets	(2.8) (2.7) (5.5) (2.8) (2.8) (5.6)
- Right of Use Assets	(6.4) (6.5) (12.9) - - -
EBIT	(5.8) 7.3 1.5 4.8 2.7 7.5
Finance Cost
- Working Capital 6	(0.6) (0.6) (1.2) (0.5) (0.6) (1.1)
- Right of Use Leases 5	(2.0) (2.5) (4.5) - - -
Profit(Loss) after tax	(8.4) 4.2 (4.2) 4.3 2.1 6.4

¹See Important Note (page 5)

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1. Inventory consists mainly of raw material (billet) and finished goods (rolled product and extrusion). $6.1m reduction from FY18 due to lower LME and reduction in billet stock

2. Trade receivables are insured. DSO is consistently below 50 days.

3. Capral has a $50m committed facility with ANZ, expiring Jan 2021 extended annually in June. At December 2019, $27.8m of the facility was used for bank guarantees and trade instruments; $3.6m fixed asset funding. Net Cash impacted by dividend payments and restructuring costs

4. Liability relates to lease liabilities of $103.6m, consisting primarily of property leases as defined in AASB16. Net impact is a reduction in Net Assets of $29.3m

5. Increase in Non-Current Assets relates to inclusion of $76.9m “right of use assets” as required by AASB16.

6. Dividend Reinvestment Plan established for FY19 final and future dividends. Not underwritten for FY19 final.

BALANCE SHEET NOTE	DEC ’19*	DEC ’18
Current Assets	$m	$m
Inventory 1	78.9	85.0
Trade Receivables 2	62.6	65.4
Net Cash and Equivalents 3	17.9	27.6
Other	1.6	1.7
	161.0	179.7
Current Liabilities
Trade Payables	(65.4)	(78.4)
Lease Liabilities 4	(13.9)	-
Provisions and Other	(14.6)	(13.2)
	(93.9)	(91.6)
Net Current Assets	67.2	88.1
Non Current Assets 5	120.6	48.1
Non Current Liabilities 4	(94.8)	(4.7)
Net Assets	93.0	131.5
Net Tangible Asset Value	89.7	128.5
NTA cents per share	18.5 c	26.7 c
Franking Credits 6	19.0	21.0
Accumulated Unrecognised tax losses	296.7	279.7

• FY19 incorporates AASB16 impact (FY18does not)

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1. Working Capital increase mainly driven by delayed Debtor payments at Year End

2. Right of use lease interest of $4.5m. Operational interest charge in line with FY18

3. Maintenance capex is around $3m per annum. Proceeds from sale relate to sale and lease back of automation equipment and paint line

4. Lease payments per AASB16

5. Capral’s policy is to declare dividends between 40 – 80% of Net Profit After Tax. At 31 December 2019, franking credits of $19m are available for distribution.

6. Declared dividend payable in March 2020 approved by ANZ Bank on back of stronger 2H19 results

CASH FLOW NOTE	FY19*	FY18
EBITDA	$m 19.9	$m 13.1
Working Capital 1	(3.4)	-
Finance Cost & Other 2	(5.6)	(1.1)
Operating Cash Flow	10.9	12.0
Capex Spend 3	(5.3)	(10.4)
Proceeds from sale 3	4.7	-
Lease Principal payment 4	(15.1)	-
Free Cash Flow	(4.8)	1.6
Dividend Paid 5	(4.8)	(8.4)
Increase/(Decrease) in Net Cash	(9.6)	(6.8)
* FY19 incorporates AASB16 impact (FY18does not)

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Income Balance Cash Flow
Statement Sheet Statement
Operating
EBITDA Assets
cash flow
$16.7m $59.7m
$15.1m
Financing
EBIT Liabilities
cash flow
$5.2m $89.1m
$15.1m
NPAT Net Assets
$0.7m $29.3m
Depreciation NAV per share
$12.9m 6.1c
Interest * AASB16 take on balances as at 1 January 2019
$4.5m
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“Deliver benefits from restructuring and technology investments to further improve Capral’s long term competitive position"

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Manufacturing	Investments in key capital projects (automation at Bremer Park and new paint line at Canning Vale) were completed in 2019. These projects, as well as the restructuring at Bremer Park, have lowered Capral’s breakeven point. Focus in 2020 to deliver cost savings from projects and streamline operations post restructure.
Distribution	Improvements in market offer and service in our aluminium distribution business with the longer term goal of increasing volume and profitability of Capral’s direct distribution channel.
Market Development	Solar The solar market in Australia is continuing to grow. Anti-dumping measures provide the opportunity for Capral to compete in the solar rail market. Defence Government has committed $195 billion in Defence spend over the next 10 years. Capral has been accredited as an approved supplier into all relevant defence contracts. Currently Capral is already supplying a number of projects with others in tender stage. Cladding Following on the Grenfell and Lacrosse cladding fires, the majority of composite panels are now banned. Nationally over 1,000 buildings need cladding replaced and all new buildings must meet new standards. Capral has signed an exclusive licence and supply agreement with Smartfix, a fully tested and certified solid aluminium cladding system patented in Australia.
Sales	Leverage investments in systems technology such as CRM, EDI and E-store to improve sales effectiveness.

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Anti-Dumping Activities

2010 to 2015	► Case won in 2010 with low level duties imposed on Chinese imports ► Reforms to federal legislation and methodology
2017	► Measures imposed against all Vietnam and some Malaysian sourced extrusions
2018	► Anti-circumvention trans shipment finalised ► Case against Thailand and two Chinese exporters unsuccessful
2019	► Variable Measures Review of China finalised with increase in duties implemented in May 2019 ► Compliance activity: Border Force issue significant duty owed notices. Action includes shutdown of companies and visa cancellations. ABF affirm enforcement to be a key focus area
Future	► Continue to interact with Government around strengthening the anti-dumping regime and monitor circumvention ► Application made to extend Chinese duties for a further 5 years past October 2020 expiry. Case underway ► Three new cases focusing on Malaysia and Vietnam underway ► Monitoring other jurisdictions and will take action as required
Challenges	► Limited information available on imports ► Trans Shipment ► New import sources

Aluminium Price

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A$/kg Metal Cost
3.30
3.10
2.90
2.70 (1)
2.50
(2)
2.30
2.10
1.90
1.70
1.50
2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019
Q1 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
LME MJP Premium (Major Japanese Ports)
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Source: London Metals Exchange: Reuters

1. MJP premiums relatively stable since major fluctuations in 2013 – 2015

2. LME (in USD) declined during 2019, however a weaker AUD partially offset this decline resulting in 8% reduction in LME in AUD (from AU$ 2,783/t to AU$ 2,565/t)

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• LME¹ is forecast to remain at current levels throughout 2020

• AUD weakened to ~$US0.67 early in 2020 and forecast to remain close to that level through 2020²

• Residential commencements are expected to bottom during the first half but recovering in the second half to finish around 158,000 units for 2020[3]

• Non-Residential construction is forecast to grow modestly

• Industrial sector anticipated to remain at current levels

• Overall Extrusion market expected to remain flat

• Capral will continue to play a leading role in the pursuit of fair trade by:

• Working with Government to strengthen anti-dumping measures

• Monitoring and pursuing circumvention activities

• Prosecuting new cases as required

• Benefits from key capital projects and restructuring will continue to flow in 2020

• Absent any unforeseen events, FY20 EBITDA⁴ is expected to be between $30m to $32m and Trading EBITDA[4] between $14m and $16m. On that basis Capral would be in a position to continue payment of a fully franked dividend

• Capral has franking credits of $19m available for distribution

• ¹ Source: Harbor Aluminium Intelligence Unit

• ² Source: ANZ January 2020

• ³ Source: BIS Oxford Economics December 2019 forecast

• ⁴ See Important Note (page 5)

This presentation includes forward-looking estimates that are subject to risks, uncertainties and assumptions outside of Capral's control and should be viewed accordingly

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Capral has a national footprint with a presence in every state and extrusion plants near five mainland capital cities

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Distribution centres
4 Bremer Park manufacturing plant
Queensland 19
► 1 Cairns AC ► Capacity 30k tonnes
► 2 Townsville RDC / AC Darwin ► 4 presses (1 moth balled)
► 3 Sunshine Coast (Kunda Park) AC 1 ► 1 paint line
► Co-located with distribution centre
► 4 Bremer Park RDC
Townsville 2 ► Recent investments: automated
► 5 Brisbane (Springwood) AC
product handling and packing
► 6 Gold Coast (Burleigh Heads) AC
3
New South Wales
► 7 Newcastle AC Brisbane 4
► 9 Erskine Park RDC 5 8 Penrith manufacturing plant
10 ► Rockdale AC 6 ► Capacity 9k tonnes
Victoria 18 17 ► 1 press
11 ► Lynbrook AC 16 Perth Adelaide 8 7 ► Recent investments: robotic packing line
12 ► Campbellfield RDC / AC 15 14 Sydney 9
13 ► Laverton AC Melbourne 10
15South Australia ► Kilburn RDC ► 16 Canning Vale manufacturing plant Capacity 8k tonnes 13 12 11 12 ► Campbellfield manufacturing plant Capacity 9k tonnes
Western Australia ► 1 press Hobart ► 1 industrial press
16 ► Canning Vale RDC ► 1 paint line 20 ► 1 paint line
17 ► Welshpool AC ► Recent investments: new paint line, warehouse ► Co-located with distribution centre
extension and site consolidation
18 ► Wangara AC ► Co-located with distribution centre
Northern Territory
19 ► Darwin RDC Manufacturing plant Distribution centre
14 Angaston manufacturing plant
Tasmania
20 ► Hobart RDC ► Capacity 9k tonnes Manufacturing plant with Corporate head office
► 1 press distribution centre (Parramatta, NSW)
► 1 paint line
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RDC – Regional Distribution Centre AC – Aluminium Centre

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