Barloworld Limited (BAW) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Barloworld's Trading Update Conference Call. [Operator Instructions] Please note that this call is being recorded. For participants who would be interested in the playback details, you may play this by e-mailing bawir@barloworld.com. Thank you. I would now like to hand the conference over to Dominic Sewela. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen, and welcome to Barloworld's preclose trading update for the 11 months to 31st August 2021. I hope most of you have had an opportunity to read, but I'm just going to go through a high-level elements of the update. I think we believe that we achieved resilient numbers if you think about the conditions under which we are trading in all our territories. I mean we still are operating under COVID in all our regions, and it's been very difficult in areas like Mongolia, where we've not been able to actually get -- and travel into Mongolia. And in Southern Africa, I guess most of you would be aware that particularly the month of -- towards the end of June and July, it has been very difficult with respect to lockdowns as well as the unrest that we've seen. So from a sociopolitical point of view, it has been a very difficult trading environment. Notwithstanding that, we've had a lot of things in our favor in terms of the actions taken last year are yielding good results if you look at Equipment Southern Africa in particular, whilst revenue in terms of machine sales is somewhat down and largely due to supply constraints in the main. But I guess on the back of the commodity prices, the business has been very resilient. We've seen a double-digit increase in parts revenue in Equipment South Africa, which is pretty good. And I think to that extent, the cost containment that Emmy is driving is yielding good results, as you can see from the operating profit. I think the DRC, we can talk about -- and Emmy can sort of delve in that a bit later. We're still in a loss-making situation, albeit improving with every month because we did take some special charges in this region. But what's also pleasing with Equipment South Africa numbers is that we've seen the order book actually increase for -- since -- over the last 2 to 3 years, we've seen it certainly at around ZAR 2.4 billion. Now we've actually seen it go to about ZAR 3.6 billion, which has been very good. I think we've got new orders coming out of Barloworld, and Emmy can comment about that later on. Eurasia, overall, I think, has been a great, great story, both VT itself as well as the newly acquired Mongolia. We've seen revenue increases in that particular region, but very strong order book once again. And I think $248 million order book for 2 region, $177 million being VT and the balance being Mongolia. And I think if you look at those results, whether you're talking operating margins, returns for this 11 months, it's been very good. I think when you move to Ingrain, I think the biggest challenge there has been the alcohol ban over the month of July. But I must say we're still trading better than expected in this business if we look at what our forecast was. But the month of July was very difficult, but notwithstanding, we continue to see a recovery. And I think we saw a better August, and then we're hoping that we will be able to have even a better September in Ingrain. And the automotive sector, being mainly car rental and Avis fleet, there, once again, all the actions taken in a very challenging environment of COVID, if there's one business that was badly impacted by COVID, it's car rental. But I think if you look at the fact that we basically had 6 months of last year of trading under COVID because the first half was really pre-COVID in this business. So if you look at these results for this 11 months, the business has done very well because it's still trading under COVID. So you'll see that probably once we have sort of a year-on-year comparables. But notwithstanding that, we're seeing fleet utilization up to 77% compared to last year. And I think in terms of operating profit, because we've taken such a huge impairment last year, and the business has recovered in terms of being repositioned out of the airport, and that business is holding well. The fleet, notwithstanding the fact that we've lost some of the fleet where certain fleets have not been renewed, particularly in some municipalities, the business revenue has declined slightly in that business. But overall, the operating profit of that business, it remains well ahead of last year. And this is really attributable to the cost savings and the restructuring that we took last year. And I think SMD is performing well. I think it's a small business that we chose to retain after we sold the motor retail, so that I'm happy with where SMD is currently. On the logistics front, I think we had a bit of a setback because I think we would have liked to sell this business as a whole. We've had offers where people wanted to buy the whole business, and some wanted to buy parts of the business. And I think what happened in July, we had 1 buyer who was far advanced who pulled out. And basically, now we are selling this business in parts and are engaging various potential buyers. And what it's going to do is basically going to shift the date that we have said that we would like to have been out of this business probably by a month or 2 but, certainly, hard at work in trying to sell the logistics business. I think, overall, when you look at the trading businesses, they've done very well in generating cash, and this has translated in what you see in our balance sheet where our net debt, level, on a comparable basis, is quite -- whilst it's high but compared to September of ZAR 2.6 billion, but you have to take into account that we've paid ZAR 5.3 billion for Ingrain. And with the exceptional cash generation, you can actually see that we are up ZAR 1.1 billion net debt in terms of [ valuation ]. And I think we'll see where we end in September. The gearing, in terms of the covenants, were well below the target set in terms of our covenant. And our view in terms of progress on the strategy is that we're focusing and prioritizing, really, that is on the disposal side and really on capital allocation more than anything else. I will pause here and maybe -- and see if there are other questions that people could be having specifically that we can answer. I do have with me on the line the FD, Nopasika. I do have some of the operational CEOs on the line. Let me pause because I can't see if there are any questions.

[Operator Instructions] Our first question is from Paul Steegers of Bank of America.

Yes. Hope you can hear me. I had a question on your automotive car rental business. When you say profits improved by 290%, can you elaborate on the base of that number? Because I believe that business was loss-making last year, and as you say, Dominic, there was also an impairment. So I'm just wondering what the actual swing in profitability is for that business in rands, millions from a loss to a -- roughly, that would be helpful.

Okay. Let me check if Ramasela is on the line. I can't see...

I am, Dominic.

Okay. Okay.

Thank you very much. If it is a swing of just under ZAR 200 million loss in the 11 months of 2020 financial year to a profit of just over ZAR 300 million. And really, the determining -- if you think about the first 6 months or the second 6 months, we still had a lot of costs in the business, especially costs like employee costs that we couldn't take out until we complete our Section 189. This is the first year where we're really seeing the benefit of our cost restructuring, from facilities all the rental expenditures that are out. But on the top line, it also relates to -- since we resized the fleet on time, and we really did an adjustment on the rate, those really came out handy for us. And we now have a robust used car market, mainly because of the semiconductor issues that are affecting new car sales. So you've got a number of factors that were either on our plans and our restructuring that we've done last year as well as the change in the structures that we did. The rate per day has increased. I mean we've seen the replacement market, which is your insurance market. Currently, we're trading at 86% of the 2019 level. And we've managed to gain new accounts during this COVID period on the replacement market. So there are a number of top line impacts as well as costs that really have converted the numbers. I mean I'm thinking about close to ZAR 0.5 billion turnaround between last year, 11 months and this year. Thank you, Dominic.

That's very helpful. May I have the opportunity for one more question, if I may be as bold? And maybe just on Ingrain, you hopefully gave some margin guidance there, but can you maybe give a little bit more quantitative color on revenue and volume momentum year-to-date for that business?

Garth, are you on the line?

Yes, I'm here. Thanks, Dominic. Maybe you all can hear me. Yes, I think just in terms of revenue growth, we've had quite extensive revenue growth during the current year in the order of probably 20% from a revenue perspective. And from a volume perspective, we're seeing around about 10% in terms of the volume growth up to the end of August from that perspective. And that's driven largely by the recoveries in the alcoholic beverage sector and then reasonably strong ongoing performance in coffee creamers and paper converting and a little bit of negative play in the paper-making sector, confectionary and the canning sector, to some extent. From an overall margin perspective, obviously, that flows through to the margins. We've seen an improvement in overall margins. And as we signaled in our guidance, not quite at the same levels as the first half, and a number of reasons for that. The second half is slightly lower from a volume perspective. We've obviously seen a bigger impact of lockdowns in the second half and also the civil unrest in July. And then from a winter tariffs point of view, it's slightly higher during the second half of the year. So I think that's really where we're sitting at the moment. And probably the last point I've got at this stage as well is that it's really important as we present our results from an ingoing perspective to focus on the EBITDA numbers when looking at the comparatives against the prior year because of the big impact of what the purchase price allocation will be against the comparators.

Our next question is from Marc Ter-Mors of SBG Securities.

Yes. Just a question on the Southern African equipment. It looks like the second half profitability has been really exceptionally -- exceptional despite the fact that the top line was still quite constrained. So can you perhaps talk about the mix of business that impacted the margin? And are some of the supply chain constraints and port hindrances, are they clearing up going into the next financial year?

Yes. Let me see if Emmy is on the line.

Yes, I am on the line.

Okay. Go ahead.

Yes. Just to give a view in terms of the top line. As we indicated, about a 2% growth, and the second half has been quite strong, and particularly both from the machine sales but also, as we've indicated, in terms of the focus on the aftermarket, particularly on the parts side, a double-digit growth, and we have seen it actually coming through in the second half. And given the fact that we indicated that the strong mix in terms of the aftermarket, which actually helped us as well with regards to the operating profit margin. And the guidance still based on what we've achieved in terms of the mix for the interim period, we foresee the similar type of mix. And talking of the logistic constraints, not necessarily from a South Africa point of view, we've indicated that overall, we have seen some challenges in terms of the overall global supply chain. But we are starting to see the clearing at the ports and then also good deliveries in terms of most of the machines as well as the parts that -- planned for the period going forward. We are not where we're supposed to be with all the bunching that we have seen at the ports, but in terms of what we are seeing in terms of the estimated delivery times, there's been some level of improvement. I hope I've answered your question. Thank you.

Our next question is from Cobus Cilliers of All Weather Capital.

I just wanted to find out, in your -- in the trading statement, you specifically mentioned congestion at the ports and difficulty in getting the goods cleared. I just wonder [Audio Gap] playing out currently. And are you finding it difficult to get stock in for the equipment sales?

Emmy, can you take them?

Yes. As we indicated with the riots that we had earlier on and -- but also that had an impact. But as I've indicated now that we are starting to see significant improvement in terms of clearing at the port. I've also indicated that we have been dealing with a lot of demurrage and delays in terms of some of the machines, but most of them have been cleared. Most of the machines that have been delivered. So I'm quite comfortable in terms of where we are in terms of the clearing at the ports.

Our next question is from Rowan Goeller of Chronux Research.

I've got 2 questions. The first one is return on equity. Dominic, you've been working quite hard on this. And I think now that the way you measure it and the good work that's been done on working capital in particular, return on equity should start to improve possibly by the end of this year. But as we flow into 2022, we should see a nice improvement. Can you just comment on the progress on there, please? I've got a second question, but I'll ask it afterwards.

Rowan, I think there is progress. One of the major constraining issue on return on equity, it's basically that we do sit with a lot of cash in our operations currently and less debt to the main. And one of the key issues for us, it is to see how we can ensure that we continue to distribute the capital back to the shareholders. As I did indicate at the first half that, that is going to be the focus. And as we basically sell some of the businesses like the automotive legs of it, and we did mention that the core businesses are going to be big cash generative, I think then we will begin to see ROE improve. Probably my sense, obviously, you're going to have to hold me to this, is that by 2023, we should be way above the hurdles that we are setting ourselves up about 15%. But it will take several actions that [ I'm no longer just about ] -- because we're going to dispose the operation. We have to address things like the pension fund in the U.K., and there are various options that we're looking at there. And whether one does special divs and/or buybacks, it will be something of that nature that we'll be having to look at to address in the element on the equity side.