Barloworld Limited (BAW) Earnings Call Transcript & Summary

Good day ladies and gentlemen, and welcome to the Barloworld Q1 voluntary trading update. [Operator Instructions] Please note that This call is being recorded. I would now like to turn the conference over to Dominic Sewela, the group CEO. Please go ahead, sir.

Thank you. Good afternoon everybody. I hope most of you have had an opportunity to read the trading update. Just by way of introduction, on the call, I have Nopasika Lila, the FD, with me. I also have Nwabisa Piki. Most of you might have met her, but some of you may not know her. She has just replaced Zanele, who is our Investor Relations Executive. I also have Quinton McGeer. It is important that if there are questions particularly on the trading update relating to Mongolia, we could cover that. And I also have Chris on the line just to walk us through if there’s a need just to talk about the current sale of the Motor Retail business. And I have Garth Macpherson on the line of Ingrain. We've had 2 months of trading with Ingrain, and I think we've also included that in the update. I think it's important just to say, obviously, year-end to September, we've had a lot of exceptional items. We've also had a lot of expenses due to Section 189 arbitrations. So it was very pleasing to actually release this update to our trading. Obviously, logistics, we still have challenges in that particular area. But I guess I'll open up to questions to allow us -- to allow you guys who have read the update to ask specific questions.

[Operator Instructions] Our first question is from James Twyman of Prescient Securities.

Yes, I've got 2 questions, and thank you very much for this update. It's extremely helpful. The first question on Mongolia. That's obviously performing, but can you give us some idea of what we're comparing it with, so what the profits and sales were in the previous year? So we know what -- whether this improvement, what this improvement is compared with. And then secondly, on your rental fleet, could you give us some idea about what the size of that business is now compared with pre-COVID?

Okay. Chris, I'll ask you to just answer Mongolia, and then I'll answer the rental question.

Thank you, Dominic. Good afternoon to everyone. Yes, the first quarter in Mongolia, it's tracking definitely better, firstly, than expectations. We bought the business in a very difficult time when the country was basically in a hard lockdown. And just as we acquired the business, the country came out of lockdown. And we had sort of a normal trading during the first quarter, except maybe for the last part of December when the country went into a hard lockdown again. But despite all of that, it was a very pleasing first quarter, a strong prime product sales, good aftermarket sales. And comparing to prior years, we don't have the breakdown by quarter as we didn't have that information. We just received information from -- on an annual basis. But taking into account the environment in which we operate, we are very, very happy in terms of the first quarter's results. And with a lot of activity currently in Mongolia, the challenges between Australia and China from a coal perspective also impacting the Mongolian coal sector positively. And I think linked to that as well is the fact that Mongolia has embarked on putting a rail infrastructure in place. They just secured quite a big $57 million locomotive, which will also assist the Mongolian coal sector because, currently, coal is transported via the route. And when that rail infrastructure is in place, that will increase export capability, which will then also be positive for the economy and our business in totality.

Okay. Thanks, Chris. And I think in terms of the rental business, last year, around this time, pre-COVID, we're sitting close to about 27,000 vehicles. We're currently sitting in the range of about 13,000 to 14,000 vehicles.

Our next question is from Howard van der Merwe of SCM.

On the sale of your automotive business to the JV partner, are you limited to tell us what your plans are with the proceeds?

I mean, not that I can say. But I think it's important to realize that first thing is to prioritize returning back the money to the shareholders. Given the fact that if you look at our balance sheet, even with the starch business, we are still sitting very comfortable. So my view is that the priority would be looking at the Board to authorize us restating the dividend because 2020 has been a difficult year for everybody, including the shareholders.

And if I could just ask one more question. You did cover it in the update with regard to the purchase of starch, and it sounds like the business is doing well. But currently, based on this new lockdown, how are you seeing that business being affected by the alcohol restrictions currently in place?

Okay. Thanks. I'm going to ask Garth to respond to that. Garth?

Thanks, Dominic. Yes, I think, obviously, I mean, there has been a ban on the sale of alcoholic beverages during the period. But unlike the very first lockdown that we had in April, May 2020, what has been allowed to continue at this point in time is for the movement of -- the brewing of alcohol and the movement of stock between DCs. So we have seen a decline in terms of normal levels of activity. But at this point in time, it's not down to the levels that we saw last year. And we await, obviously, the announcements going forward from this particular sector. The other thing just to say, well, is that what -- when we went into this current lockdown, stocks across all the major brewers and everything were at very low levels. And they've also taken this opportunity to read all their stocks within the system, and we expect to see a very similar offtake that we saw coming out of lockdown 2 in August and September, where we've seen very strong recovery in demand.

Our next question is from Nomandla Duma of Allan Gray.

I just wanted to ask as it relate to the sale of the automotive business. From your numbers, what multiples did you guys -- earnings multiples that you guys pay for the business? And then the other question that I have is that, is the long-term intention to exit the automotive business altogether?

Yes. Thank you. Chris, do you want to respond to the Motor Retail sale?

Thank you, Dominic. Good afternoon, everyone. I think just to answer the question, in terms of Motor Retail, we had a very difficult 2020. But I think going backwards, you would have realized that Motor Retail or Motor Trading would have historically reported about ZAR 500 million of operating profit historically. I think just in terms of that ZAR 500 million operating, I just want to bring to your attention that about ZAR 300 million of that ZAR 500 million represented the Motor Retail business that we're selling today. The other ZAR 125 million of that number represented the 11 months of trading of NMI that was included while it was a subsidiary in the group. And then the balance, also, just over ZAR 100 million, was made up of the contribution from our used vehicle and disposal business, which includes SMD, which sells the insurance vehicles on behalf of insurers and others that have been in motor vehicle accidents, et cetera. So the subject of this transaction is only in the Motor Retail business that is going. And in the 2020 numbers, we reported an operating loss of ZAR 12 million in the segment. ZAR 66 million was the loss in Motor Retail and about ZAR 54 million of that was the profit that was generated out of SMD and the other used vehicle trading platform that we have. So I'm giving you that context within the structure of how we look at the multiple going forward. The resultant multiple that we've worked out on the basis of a normalized -- a return to normalized trading environment with volumes recovering, et cetera, would represent a PE of roughly 10 to 12x on a forward look, and that obviously is taking into account the impact of the restructuring that we've taken and then a return to more normal levels in that business over the next year or 2 years. But in terms of how we calculated the price, we very much used the industry norms, which is a net asset value type valuation on the inventories, working capital and underlying plant and equipment in the dealership, thus a profitability premium to arrive at the ZAR 400 million premium for the business. Dominic, do you want to take the question on the longer-term intentions on Motor?

Yes. Thanks, Chris. I think it's important to understand that Barloworld has got a multitude of OEMs in that motor space. So if we were to do an outright sale immediately, it was just to complicate our lives. I mean it'd probably take forever to do the transactions. Given the fact that most of them are aware of our partner being -- the NMI, our partners, being the Akoo family over this last 17 years, it's more palatable for OEMs to be able to agree to this transaction. And obviously, it makes it easy then to do the second transaction thereafter. What I said is that our view is to exit automotive and logistics entirely over the next 3 years or so. And largely, it's because of the current condition that we're finding ourselves at. If you were to put a sales process for rent a car and leasing, I don't think that will be accretive to shareholders. And we do take into account that logistics is not going to be an easy sale, but that's -- and the process is ongoing. And yes, that would answer your question, I hope.

Our next question is from Roy Campbell of RMB Morgan Stanley.

A few questions from my side. Maybe just for Quinton on the Eurasia area, where we're just talking about Mongolia and the base. In the note, that's -- what I think it says is that Mongolia is up well above comparative -- the comparative period. Maybe you can just talk through Russia in that case just on a like-for-like basis, if you can just strip out Mongolia and just discuss what Russia is and maybe the impact of the slowdown in the aftermarket. And then second question is related to the operations. Just in the Bartrac JV, is the performance to date, is that lower than what you were expecting? And so is it likely that this kind of market continues, and so your expectations of a recovery this year has maybe changed? Now I've got another question, if you don't mind, but I'll leave it there for now.

Okay. Let me start with the DRC, and then I'll get Quinton to answer your first question. You are correct. I think in terms of expectations, is that as of this quarter, we are still in a loss-making situation. And our view is that we will have to actually take out costs in terms of people, close to about 20% of the employees. We have about 500 more people. So we'll take about 100-odd people by end of March, and we expect those costs to come through between now and March. So come to March, we still think there will be improvement. And I think we'll begin to see the improvement in the tail end of the calendar year, not so much so our year end. That's when we think the loss will be less. Lastly, it's because our [indiscernible] is still under care and maintenance. And you also have -- now actively picking up with TFM. But what's currently carrying that is KCC. And our view is that it is lower than what we thought initially initiative. So Quinton, do you want to talk about VT?

Thank you, Dominic. Yes, from a Russian perspective, the first quarter has been very, very similar to the prior year in comparison from a revenue perspective, very close to the prior year. And then from a bottom line perspective, after tax, slightly better than prior year. So with the slowdown in aftermarket, prime product sales has picked up. And that cushioned the revenue number. So with that as well, the firm order book has grown as well from September quite substantially, where we sit today. So despite the slowdown in aftermarket, where it was driven by a little bit of the coal market that was depressed as well as the impact of COVID, where there was a slowdown and companies did [indiscernible] a little bit on these practices, the overall results satisfactory in line with the prior year and linked to that positive growth on the term order book.

Thanks, Quinton. And so just to -- you mentioned the rate of restructure and the $57 million. So well, the $57 million you referred to, was that order intake? Or is that spend from Mongolian's perspective?

So yes, that's not a deal that we did. It's a deal that we were involved that we facilitated and was acting as an agent for the transaction. So it's not revenue that will be reflected in our books. But I think the positive part of it, it's a deal, locomotives from Caterpillar with Caterpillar engines. And we acted as an agent because that's not part of our product line, locomotives. And then the overall positive impact on the country, and I think that's quite important for us.

Okay. Good. Right. And then just maybe for Chris, just 2 questions on the disposal of automotive. If you can just talk through some of the economics of the deal. So is there any recourse on Barloworld on the debt that will be raised within the JV? That's one question. And then, obviously, the dealerships that you'd be selling into the JV would form part of the kind of the propco, opco deal that was structured recently. Do those properties go -- get sold with the operating companies? Or if you can just -- maybe just give us a bit of economics behind that.

Thanks for the question, Roy. I think let's first have a look at the issue on the importance of the deal. I think we've seen that we've got capacity on NMI's balance sheet to introduce some leverage against their property portfolio. So we'll be utilizing that to fund just sort of the proceeds of the transaction. Currently, Barloworld does have quite substantial guarantees out to the financial providers of the floor plan facilities, which have been netted off in that -- in the number that we've shown as the tangible net asset value. So at 30 September, that number was just over ZAR 1.1 billion with the floor plan funding that moves across with the working capital in this transaction. So in terms of that, we're aiming to negotiate with the funds, and we're currently in those discussions to obviously transfer the floor plan to NMI. And in terms of our shareholders' agreement, we do have, let's call it, a proportional -- a provision for proportional guarantees, should the Board of NMI deem them necessary. So I think our first priority here would be to obtain 100% release of all guarantees in respect of the facilities that do move across, and probably our fallback position would be to guarantee 50%. So in a worst-case scenario, we would release 50% of the guarantees that we currently have in place against those floor plan facilities. And then turning our attention to the transaction. What is negotiated at this point, Roy, is to feed and assign all leases, so both the internal ones with Khula Sizwe and the property restructure that we did as well as the third-party leases. And so those obligations are expected to transfer with their rentals currently intact into the joint venture. So there's been no talk of renegotiation of those leases to different rates or anything. They're part and parcel of the trading of the business and should move across with the business as a whole.