Barloworld Limited (BAW) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Barloworld Pre-Close Trading Update. [Operator Instructions] Please note that this call is being recorded. I would now like to hand the conference over to Dominic Sewela. Please go ahead, sir.

Thank you very much. Good afternoon, everybody, on the line. I hope wherever you are, you're safe. And joining me on this call on my side, I've got Chris Wierenga, the CEO of the consumer business as well as welcome Quinton. Quinton is here physically with us this time around. We also have Ramasela on the line the CEO of Avis, and we also have Andronicca, Chief Operating Officer of Equipment. I've got with me, Nopasika, who's the FD and Nwabisa, our Investor Relations Executive. I guess also you have an opportunity to look at the voluntary trading update for the 5 months to the 28th of February 2022. And I would like to say it's been a great 5 months up until the 24th of February when we have challenges coming out of Ukraine and Russia. But notwithstanding that, I think the business overall has done very well for this last 5 months. I think more importantly, the Equipment Southern Africa we've seen a turnaround particularly in the DRC. The order book is almost at an all-time high in Equipment Southern Africa. I will give Andronicca a bit of time to highlight some areas. And when it comes to Equipment Eurasia, I think, Quinton, by all accounts, this could have been one of greatest years, if you look at the 5 months. But I guess given the challenges of functions, things will evolve and over time, we will see that it might be a challenging 6 months from here on. But I guess, having said so, it's still good to see that the order book is solid in Eurasia as well. And then you'll talk probably more Mongolia as well. And I think on Chris' side as well, we've seen good volume pickup Chris on your side. And so I think overall, the business has done well. But the bigger turnaround has really been in Car Rental, in Avis Fleet. Ramasela's teams have done well there and we still have an opportunity to also just give us a highlight. Maybe let's give over to Andronicca. Just key highlights I don't know given the fact that most of the people on the call have already seen the statement.

Thanks, Dominic, and good afternoon, everyone. Just quick highlights from Equipment Southern Africa. We have seen in the trading update that one of the highlights is the recovery of Rest of Africa. In the past, we had noted that we were operating at a speed of about 70-30, 70 being SA operations. Where we are now, rest of Africa is moving towards the 60-40 split that we have enjoyed in the past. From a South Africa perspective, we had a bit of a slow start mainly influenced by supply chain constraints but also as a result of the type of market that we're serving, quite a number of the contractors. Some of the finalization of the contract miners with the mining houses was delayed, but we are starting to pick up and deliver on those. Operating profit was up. We are committed to delivering the operating margin that we have already shared with you in terms of what it looks like. And I know for the 5 months, we are slightly below the 10%, but we are seeing activity picking up in the second quarter of the year as the supply chain constraints, and we expect the margins to improve closer to 10% by half year when we report. On the positive side, as Dominic alluded, DRC is doing well. The turnaround plan is delivering results. And since the beginning of the financial year, DRC has been reporting positive results. Thanks, Dom.

Thank you, Andro. Quinton, may be let me hand over to you.

Thank you, Dominic. Good afternoon to everyone. I think from a Eurasia perspective, up until February, it's fair to say that in the Russian environment, it was a record result for the first 5 months, both at the revenue side as well as at the operating level. We managed to grow our firm order book from already a good solid $224 million to the end Feb to $314 million and a very well-balanced diversified from order book with all commodities represented: gold, coal, diamonds, copper, nickel and then also very, very strong construction and power firm order book. I think also based on highlight that even from a cash perspective up until February results were exceptionally well, and we had a very, very clean book in Russia. I think Mongolia on the other side, the trading has been not as expected, but largely due to China, with China closing its borders, firstly, due to the Winter Olympics. China has got no COVID policy. So they are very strict on the border, and those border closures has hit us quite severe in the first 5 months. But irrespective of that the business still generated a very solid good quality operating margin. I think maybe it's fair to say that during February, the conflict arose between Russia and Ukraine, and there were quite a number of sanctions that were implemented. And the business is now focused on firstly, understanding, interpreting and then complying. So I think Dominic has alluded to it. I think the next few months will be challenging, but I'm sure we will work through it. We've been through this before, and we'll focus on what we can control for now. Thanks, Dom.

Thanks, Quinton for the summary. Chris?

Thank you, Dominic. Good afternoon, everyone. I just think -- just touching on the Consumer Industries vertical and specifically Ingrain, we've had a very good performance of the business, bearing in mind that now we're looking at 5 months included in our actual results versus 4 months in the prior year. So you'll see an up drift because of the additional months of trading in the business. Despite that, we're seeing very strong volume and price improvements across most of the businesses with all sectors performing very well. We've seen a strong recovery in our Alcoholic Beverages sector. And I think that's boded well because of the lockdowns and restrictions on sales of alcohol in the prior reporting periods. Obviously, the contribution from that sector is slightly lower than what we see overall in the business, so the mix in volumes has reduced kind of contribution margins in the business. The rand-for-rand EBITDA between the 2 reporting periods is up quite strongly. More pleasingly for the business, though, is we've had higher plant ability on the back of the rollout of BBS across the business. And we've seen a much better peak coming into sort of October, November, December this year with plants performing ahead of the prior year and improving maize grind as well. And within the business at the moment, we are seeing rising maize prices, and these are being dealt with -- in line with our hedging strategy. And so we are investing in -- for the margin on the SAFEX account necessary. That will obviously unwind as those customer contracts are priced going forward. But more importantly, in the business in the short term, we have secured maize until mid-2023 and obviously continuously monitoring maize prices and availability in the current situation. But we're sitting with good crops that have been harvested. We're expecting a good harvest coming through despite some of the crop damage that we see. We are anticipating -- our experts on the ground of telling us that we should see a crop in excess of 15,000 tonnes this year. And yes, I think if I look at as well in the business over the period, we continue to invest in the maintenance CapEx that we'd seen pre-acquisition and obviously also investing in the critical skills required to maintain the plant availability and improve maintenance practices in the business. So I think overall, in the period under review, things are going well. We're obviously monitoring the just for an external environment very, very closely, domestic volumes are strong, pricing is coming through nicely, and we're seeing opportunity going forward in the organic growth of the business as well.

Thanks, Chris. Ramasela?

Thank you very much, Dominic. Good afternoon, everyone. I think it is safe to say that we have learned over the period to whither the COVID storm. If you just think back that the last couple of months for us, the 5 months was when Omicron just started, and we've traded ourself very well out of that Omicron phase. And looking at just our operating profit from a Car Rental point of view, one of the key things was when you look at the volume of 2019, we are still operating at 65% of 2019 mainly because, as we know, inbound was not yet back. I mean, we're trading still on average between 11% and 12% over the 2019. But our operating profit, which is what -- which is we've highlighted when we really get into the deep dive of COVID to say how are we going to just work our way out of this, and looking at our strategy of moving from the airport, looking at the subscription model, we still get surprised every day with the amount of subscription that we get out of the market, how the market is moving, taking up the subscription model. The placement business. I think in South Africa, when you see rain, you can already factor some good business for car rentals, and we had a couple of good rains in a couple of months. But our efficiencies and key as everybody knows about the constraints of the fleet in the market, our efficiencies really are showing off when you start looking at the fleet utilization. I mean you get to a point where this is average throughout Southern Africa and all our operations, but you get to a point where Gauteng will run at an average of 83% and Cape Town at 81% . So -- and it's all about the turnaround. The time that the fleet available for utilization, we've improved that. We've mastered that process, and it's something that we will continue working to improve. I mean as I keep on referring to this utilization that you will find it difficult to compare anything close to 75% in the standard. And that's something that we're really working hard to keep. The used car market remains buoyant. I mean with the shortage of fleet, margins no doubt has really become even stronger than it has been in the previous years. And we'll continue making sure that we sell at the right time based on kilometers and at the time that we have the fleet so that we balance our business very well. We are happy to start seeing domestic market picking up. December was one good period where we saw a lot of domestic travel. Looking at the leasing business, we're seeing corporate coming on board in a strong way. One of the things that corporate is starting to is really funding through the financing lease. That book of ours is growing. The challenge is just delivering them on time purely because of the delay in the supply. But other than that, a very good solid business for both Leasing and Car Rental with very strong EBITDA level when you compare 2019 now when we look at the operating profit, we've already surpassed the February 2019 level. So that's something and if you think about it in South Africa COVID only hit us for real in March. So that 5 months was we coin pre-COVID in South Africa and we've managed to surpass this. So we are well geared, I think, where we're setting to continuously grow based on our strategy and of course, containment that we've done over the period. Bearing in mind that the used car market, as we know, it doesn't look like it's slowing down any time. And this is one thing that we will always manage and monitor when we look at our total fleet from both the leasing and the car rental operation. Thank you very much, Dominic.

Thanks, Ramasela. I think you've got to get a sense from all the trading activities that overall, notwithstanding the challenges we're still operating under. We still have COVID in this country and -- but the business -- all the businesses are doing well. And on the logistics front, in terms of activity, our auto and logistics, we've seen progress. We've basically finalized the bulk of the transport business in Manline Energy, Manline Freight and Timber, which was concluded end of February. The money is in the bank. In terms of the transaction we've sold 51% of Aspen Logistics. I think that was around this -- in November last year. And currently, we are in the throes of concluding the supply chain business, obviously, by the end of this month, basically, we should be -- sign the SPA regarding that transaction. And I think overall -- I just wanted to update around the de-risking of the pension fund. To that extent, we have invested some capital to de-risk that, and that's -- that will give us flexibility and ability to move the money in between the U.K. and South Africa. And we are currently looking at insurance companies that could actually buy that liability from us. I think by the time of the business results in May will give you a further update on that front. And I guess all of you received your dividend in January. And the reason why I'm highlighting these 2 events is that when you look at the cash generation, we had to utilize cash over this period and largely because of the order book that we've seen in both Russia and South Africa as well as the fleet size in Avis and therefore, this will unwind in the second half. I will pause there and see if you have questions that we can take.

[Operator Instructions] We have a question from Paul Steegers of Bank of America.

There is a question for Quinton and maybe Dominic. On Eurasia, on Russia, the next few months are going to be obviously difficult, we get that. Just wondering with Caterpillar, I believe, suspending operations, they haven't fully pulled out yet. Is that correct? That's the first part of the question. And how are you going to manage this business? Will it potential become loss-making? Or will you look to sort of wind it down and potentially sell it? I'm just wondering what the outlook is there for the Russian services business in light of what Caterpillar is doing and what you're seeing on the ground going forward.

Thanks, Paul, for the question. I think you have just sort of outlined the areas where we operate. And I've said previously that at Barloworld our focus is in emerging markets. And these areas irrespective of when you look at Mongolia, the DRC as well as Angola and now Russia, these are very challenging environments that we operate here. But I think as Barloworld, we operate in those environments and making sure that we stick to a lot of the countries where we operate in and also not playing politics and then making sure that our businesses too look after our customers. And so with respect to Caterpillar, as announcements, they spoke about the suspension of their Tosno manufacturing. And to that extent, that's what they're speaking about. You remember, Caterpillar only manufactures in Russia in Tosno and Novosibirsk as well. Those are suspensions that we've spoken about. But you have several dealers. One --we are one of the dealers, so Caterpillar around the world, they distribute the equipment through the dealer, through the network. I guess what's constraining us for is that some of these functions we have to comply with basically sanctions, not just only from the U.S., but the U.K., EU as well as Russia counter-sanctions, and that creates a lot of challenge. I think Quinton and the team are on the ground making sure that we comply with the sanctions. That makes it difficult. Our view at this point is that we're going to hunker down and continue to support our customers in Russia, and hopefully, the conflict gets resolved earlier. But my view is that given the past experience, this is worse than we anticipated. We are likely to be in the situation for the long haul. And so the mandate to Quinton and the team is to do their level best to serve our customers where they can. But I can't tell you today how -- what things are going to be tomorrow. And as long as we're able to trade, we'll trade. But if we can't trade, it's a different story. I think that's why we're saying, basically, this is a likelihood that we'll have to look at impairment in this situation because the longer the process lasts in terms of the conflict and the sanctions stays, it makes it even more difficult for us to trade. Therefore, it's difficult to predict for 6 months and 12 months is going to look like. And I guess we say at the time of finalizing the results in May, we'd know the effect of what might you be taking in the space. I don't know, Quinton, if you want to explain better?

No. I think, Dom, you summarized it. And Paul, just to add, I think our mantra with the team is to focus on what we can control, focus on our customers and focus on assisting and supporting one another in Russia. And I think that's all that we can do at this point in time. And obviously, as Dom has alluded to, this compliance is a very, very important part of our business. So things will get slower as the time passes until there's a full grasp exactly what you can do and what you can't do. And I think then the other thing then that's also impacting us is that things keep on changing. What's allowed today might not be relevant tomorrow. So for us, it's managing the business day to day and focusing on what we can control and our customers. And I think, yes, I think that's all I wanted to add.

I appreciate that sentiment. But I guess, sorry, I'm just coming back to the question. Do you think that in the next 6 months, that -- there's a big, fixed cost base here? Things are going to slow, and it's obviously nobody's fault, but do you think that business will be loss-making in the next 6-month period? Because ironically, you've had record results. It's really frustrating for you, obviously, but I'm just wondering now going forward, can you -- what you can control and the cost that you have there, how quickly does this business move down in terms of profitability and will it become loss-making? I guess that's the question.

I guess it's very difficult, Paul. Currently, particularly if you look at the trading for the last 5 months, and there is still trading taking place in the territory. But if you look at the business overall in terms of the cost structure is one of our leanest business. But having said that, though, I think the challenge you have because things are fluid. But currently, customers are also anticipating the challenges. They're ordering. The issue is going to be to what extent from a supply chain point of view would we be able to get passed into the territory once you comply with ] in place. And that's going to be something that determines whether or not we are going to be profitable or not. But key for us because it's going to take a long-term view here is that 50% of the staff there is aftermarket. If people are looking after service. It's to make sure that we don't lose the skills because -- and my view is that come the 20th of March or after 20th of March when we release results, we'll be able to give you better insights, Paul. I know it's frustrating for all of us in terms of wanting to get certainty, but unfortunately, that's what it is in terms of a challenge that we have. But at the moment, we haven't taken a view that are we going to be loss-making. But we do believe that if we don't have clear visibility come the time, we depending on the numbers, we'll have to take impairment.

I appreciate the insight. And while I have the mic, one last question from me, apologies. Just you've mentioned the looking to unbundle or sell Avis, both Fleet and Car Rental, we can all make our view on how much those businesses are worth. So the question is how much debt is in those businesses, broadly speaking? And then secondly, if you manage to unbundle, sell it, whatever happens by the end of the year, what would you do with any proceeds from that sale?

Yes. So as I've said, the commitment in terms of the capital allocation strategy is that whenever we sell and we get the proceeds, first and foremost, and we say is there an opportunity to buy back. And at this level, clearly, there is a huge opportunity for us to buy back. If alternatively, like we've done, we'll repatriate the capital back to the shareholders. And if there's an opportunity to further strengthen the consumer industries or the Equipment industry, we will look at it in that order. And as I said, that's what we'll do with the capital.

Next question is from James Twyman of Prescient Securities.

Yes. I've got 2 questions. The first one is, as far as Russia is concerned, can you actually say whether Caterpillar is still -- are you still getting supplies from Caterpillar into Russia? Or has the trade of product basically stopped, and therefore, you're already in the process of running down your inventory? Just to get an idea of the timing of that. And then secondly, how is Mongolia affected by this? Are they still able to continue? I know you said business is slow, but are they still able to get product from Caterpillar presumably by China? So that's it for me.

Okay. I think let's maybe just first deal with the Mongolian question. I think from a Mongolian perspective, Mongolia was never reliant on Russian. In fact, no product, except the product that was manufactured in Russia, came from Russia to Mongolia. So the events in Russia-Ukraine doesn't impact Mongolia directly. What impacts Mongolia is China. Anything that happens in China impacts Mongolia automatically. And I think -- so for us, we also got to look at China. So when China shuts down for COVID or COVID outbreak or whatever the case might be, that impacts the supply chain through to Mongolia because it means the Chinese ports or borders are closed. So that's something that we're managing separately. And then I think question on Russia -- what was the question was the question on Russia again?

Whether you're able to trade with Caterpillar.

So Caterpillar like all suppliers in the world is busy interpreting and understanding what are you allowed to do, and what you're not allowed to do. And it sounds that it's relatively easy to interpret, but it's not. And I mean, from a product perspective, that's easy. And we've got clear guidance what and how product can flow. However, the customs in all the various countries, product flows through customs. And customs first needs to understand exactly is this allowed to go through to Russia or not. So Caterpillar is still in that process, working through the process in terms of to see what's being sanctioned, what types of products is allowed because there are certain products like dual-use parts or whatever the case might be, that's not allowed to be sold to Russia. So that process is quite complicated. It's comprehensive. It's not just Caterpillar that's in this customs needs to make sure that they cover all suppliers in the world. And so that's where the hold-up is. Caterpillar hasn't stopped shipping to Russia. They haven't withdrawn. But they need to work through the process and customs needs to work through the process in terms of what's allowed through customs to Russia. And that process because it's so big, will take time. But I'm pretty sure that over the next month or 2, there will be a lot more clarity in terms of that exactly. And customs will know that when they allow this shipment to pass that is actually in terms of complying with all legislation.

James [indiscernible].

I am. If I could ask one more quick question, if I may. Just on the unbundling, well, it was going to be a sale of the Avis business. And now you've mentioned unbundling. Does that mean that we should be a little concerned that you're not so confident on pricing? Or does it more likely mean that unbundling as an additional option to speed the process up?

I think you might have asked is speed that process started because we've received the bids from potential buyers. But I guess a lot of people tend to want to take advantage thinking that because of COVID, then we'll take any price. But obviously, the business has done phenomenally well. To that extent, we're running this process dual processes, to say, we look at sales if it's warranted. Remember, when we sell the business, we'll actually have to get approval from Avis. And unbundling, similarly, we have to get a clearance. But I think we got to get to a point where we say what's the best interest of the shareholders in terms of the process to get the right value.

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