Barloworld Limited (BAW) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and thank you for your patience. Welcome to the Barloworld's Pre-close Trading Update. [Operator Instructions] Please note that this event is being recorded. I would now like to hand the conference over to Mr. Dominic Sewela. Please go, sir.

Thank you very much. Good afternoon, everybody. Those are on the line, I will also apologize we've had a glitch on our side because we couldn't hear the call and there are some of my colleagues that are not connected. So if you could just pardon us. They will try and connect. But in the meantime, I think it's important that I point out that we issued today the voluntary trading update earlier in the morning, for the 5 months to 28 of February. And I'm pleased to say that when I look at the results for that period, taking into account the challenges that we all have as business people, where you look at geopolitical issues regional issues, regional issues and specifically asset and challenges in South Africa that I think most of you are familiar with those. And these results are a good set of results for the trading period. But I think it's important to note that when you look at the revenue growth, if you were to exclude Russia, out of those numbers on a comparable basis, previous year and now the core business is up to the [38%] on the revenue line. I think we will work it out in terms of the detail that we provided. The other issue that's important is that we have succeeded in executing the strategy to pivot out of the Automotive and Logistics business and that was -- the last action was really the unbundling and the listing of Avis. Having done so, it leaves Barloworld with the 2 business being equipment distribution as well as the Ingrain business. And with that, I think it is significant because what we're trying to also do is to ensure that in terms of fiscal discipline and being able to manage our balance sheet, we've been able to also take a lot of action around the issue of patient coming through in terms of the results, whether you look at where we are in terms of our funding requirements. But I think it's important for me to also highlight the fact that Mongolia has rebounded following the opening of the borders of China, and I think we're seeing growth coming through very strongly. And importantly, also to highlight Southern Africa because for a while, we did talk about the hours in terms of the machines in the field and that there's got to be a placement CapEx required. We've seen that coming through in terms of the order book for Southern Africa. And I think Ingrain, relatively speaking, albeit the volumes are down, but revenue is up in that business. And I guess, just given the fact that most of you would have read the trading update, I'd like to open up to questions so that you can then engage yourself on specific questions that you may have. Nwabisa, are we able to?

We are just waiting for others to join via the alternative line.

Okay. All right.

[indiscernible].

Yes, yes. So we are ready to take any questions that could be on the line at the moment.

[Operator Instructions] The first question comes from Paul Steegers of Nedbank.

Yes. Dominic can you hear me?

Yes, I can hear you.

Okay. Yes, just a quick one on Russia, maybe for you or Quinton, obviously, a good performance year-to-date and still profitable even though revenue is under pressure. I'm just wondering if you can take us through the sort of the income statement there in terms of variable costs that have been taken out, fixed costs in terms of personal branches? And what are the expectations for the second half, when -- I presume you've now been quite confident of your breakeven forecast for the full year for Russia. But I'm just wondering, second half, at what stage given the sanctions, would you not able to sell in the product and it's more sort of refurbs aftermarket and then using tools? And related to that question, are you allowed to [indiscernible] other related brands given the sanctions o in the products?

And I'm not too sure, but Quinton has been able to log in following the [tone]. But I think if we just look at the performance for the 5 months, certainly, the business is above our expectations, largely due to the actions that we've taken around costs because we did say we're aiming to break even in that business but there's been some natural attrition where we have employees resigned for other opportunities, I guess, maybe they're anticipating that there would be a much opportunity in this regard. But I think in terms of competitor products, it's important that most of the competitors are safe for Chinese competitors. We are all affected by hunt in this area. Therefore, from a product point of view, we couldn't distribute competitive product in Russia and Caterpillar will not allow us because we are a sole Caterpillar dealer in the distributor in that market. Therefore, we can't -- we can only distribute what we call SCM, which is a product that's manufactured out of China. And that product is mainly construction-related product. It is not mining related. Therefore, when you look at the size of that market, it is relatively small. So when you look at the performance that you're seeing here, part of it is really on the parts side and the aftermarket where we are selling pass-through service to the customers that are not impacted by sanctions, and we have bought as much part as we could, and we are able to realize good margins out of those -- the past business in the territory. I think to the extent that if the [indiscernible], one cannot preclude a situation where Caterpillar can say we can't operate in the territory because we are a distributor of Caterpillar and we are a licensee. Therefore, we are tied to whatever Caterpillar could do in that territory. But currently, we are able to trade in terms of, as I said, SCM, we are able to trade part, albeit it's very difficult logistics, as you can imagine, the trade routes are not quite easy to get there, but the team also has to make sure that the attention to detail in terms of the compliance is met at all times. And those are some of the challenges that we have. But under the circumstance you're saying, we will continue to do that as far as we could. And the commitment that our view is that we would look at the worst case even in this business and we'll continue to monitor that. The outlook if nothing were to change, but it's a dynamic situation, we are likely to be slightly profitable. If I now look at the outlook for the balance of the year or probably to break even. But I think the prospects we're currently sitting looks slightly better than what we had forecasted in terms of breakeven situation. I hope I've covered your question. I don't know if there's anything that I've left out.

Yes. No, I think that's useful. I guess it's very difficult to predict what's going to happen with this conflict, right? But given what you know now, if this conflict carries on for another 12 months, realistically, will you be able to break even next fiscal year as well, like ways you can do that with that because revenue will probably keep coming down. I'm just trying to get a sense at some stage that this business realistically or potentially become loss-making. And then when you take the decision to exit, if at all or do you just take it on a 12-month basis to see what happens?

I guess from -- and I've said this previously last year when the war broke out, that we tend to take a long-term view and that we've operated in other regions like Mozambique, where for a long time, we try and maintain a breakeven situation in operations where we have -- had a license holder, and we believe when you look at the fundamentals in terms of endowment of what the country has in terms of mineral resources, opportunities long term, we are able to have that whole pattern. Our intention is definitely not to lose money. If we start losing money, we will definitely take drastic actions to that effect. And then hence, we gave the guidance that a breakeven situation is what will happen. But I mean -- but like any business person, I can't hold a position where once there is risk to loss of life, risk to Barloworld that we will hold. We will obviously take a view as things progress because it's very difficult to predict 2 years for us in this type of situation, and we're hoping that things could be better. But we will take the necessary action as and when. But definitely, as you said, we would like to stay in territories in this major market where we are licensees as long as it is practical in those environments. Quinton, I don't know if you've joined the line? Quinton, you able to hear me?

Yes, Dominic. Good afternoon, everyone. Yes, I can hear you now.

Okay. Maybe you want to just give your take?

Yes. I think, Dom, you've actually summarized it very well. I can't really add maybe just to say that based on the current situation in the Russia, there's still freely dollars available. You can exchange between dollars and rubles. The risk system for non-sanction banks are still operating. And I think our business in Russia is completely self-funded. There's no financial support from the group. We're managing it as is today. I think Dom has alluded to what we expect in the next 6 months. And I think next year, we will have to constantly reset as the sanctions evolved. And maybe just to summarize the sanctions, from our perspective, we need to comply with all U.K. sanctions. That's what added that. We have to comply with the U.S. and EU sanctions only where there's a nexus. So that means there's a lot more leeway from that perspective. However, we need to consider the U.S. export restrictions. So whenever there's a control products that moves and it's from a U.S. origin, there's a certain percentage; and that product, we cannot move across the border. So which then basically takes the whole Caterpillar product line up, except for the Chinese product that Dom has spoken about. So Dom, I can't really add any more color to that.

Okay. Thank you. I appreciate it. Any other questions?

[Operator Instructions] The next question comes from Marc Ter-Mors SBGS.

Just 2 questions, if I may. The first one relates to Ingrain, the starch business. Could you comment how the so-called Stage 5 and 6 load shedding may have impacted some of the efficiencies and the operation conditions of the equipment and perhaps what has been the mitigating action of management in investing perhaps and undoing some of the bottlenecks? And then the last question regarding the balance sheet. I think the statement made a comment about funding potential headroom of ZAR 16 billion. I assume that next year, the Zeda loan of about ZAR 1 billion also becomes [available]. Could you comment further on potential capital uses of that headroom on the balance sheet?

And let me -- Chris is on the line. Chris do you want to -- do you hear that question?

Yes, Dominic, I did. Good afternoon, Marc and good afternoon, everyone. So Marc, I think if I look at the period under review, we did suffer quite a few efficiency losses and particularly in the month of February, if you compare our trading update or the outlook given at the AGM versus the month of February. And we probably took about a ZAR 50 million hit on efficiency losses in the month of -- in the month of February alone. We were impacted there with some power dips coming through. So I don't think we have an issue at this stage. The stage 5 and 6 load shedding directly on the business. But we did suffer from some client reliability and some unplanned breakdowns in that particular month, which contributes quite heavily to those losses that we experienced. So it's quite a big swing year-on-year. If we have a look at some of the containment actions that we're putting in place, we are doing further work on our energy supply security, looking at alternative sources, solar supported by potential for gas gensets potentially. And we'd also need to look at some battery backup to deal with load transitioning in the plant. But there is something that is in our longer-term capital plan. And we should see that those effects going to come through in 2024 for us. I think the one issue that we are sensing though as well is we're not looking at our customer base, although we still have access to the electricity supply the dips notwithstanding, we are starting to see some impacts and particularly on our customer base that is manufacturing out in the Eastern corridor where we are seeing both power dips come for an extended period of time. And some of those customers are now also starting to experience some water shortages. So we've got these 12-hour water shuts, which are starting to impact production and therefore, some offtakes in some of the midsize market segments that we're seeing.

Marc, I guess maybe just to answer your question, I think you're correct in terms of the ZAR 16 billion headroom currently. But is it going to say currently, because remember, when you have large order books like we have in our equipment business, in the first 6 months, you're utilizing cash. Therefore, you likely to see that unwind in the second half, but headroom is going to move up. But fundamentally, you also -- as you correctly pointed out, that a 1.5 billion loan that we made to Zeda it is slowly coming down. In our view by the end of September, the bulk of it should be out of our books, and it will actually give us a headroom. I think when it comes to what we then do, I think it goes back to the issue of capital allocation. And I've outlined our capital allocation, our thesis that we do what it is in the best interest of the company when we look at various opportunities, whether we seek to repeat share buybacks. Alternatively, we look at paying down debt. Clearly, with the yield cases where they are at. And when you look at cost of funds, we will be continuously looking at the pros and cons, whether it is beneficial to pay down some of the debt because our debt profile in terms of the tenure is different. And obviously, there are institutions where we either have fixed loans. And that will be a continuing assessment first and foremost. Our focus in terms of opportunities is becoming -- the bulk of the capital is going to be on organic growth, first and foremost. And I think to an extent that there are opportunities but present themselves in terms of the 2 segments that we have now, we would look at those and -- but it will be to see if are they attractive or not. But that's basically what we will be using the cash flow for. And we don't do large dividends because I think our policy is intact. And then we've given these guidelines in terms of our payout ratio for the dividend point of view.

The next question comes from Brent Madel of Absa CIB.

Yes. Just some questions from my side, if I can. My first question, just on Russia, my understanding is that you have leeway to sell preowned equipment. I just want to, first of all, find out whether you were able to source equipment and find the distribution channel into Russia with preowned equipment and whether that did have an impact on the results? And maybe if you can just give me an indication of whether that strategy continues to be the alternative? And then my second question is just on the bar track at a JV in the DRC and granted that the performance was up on the comparable period, but it looks like it's tracking well -- is tracking behind what you achieved in the second half look like a stronger performance in the second half last year related to the first half. I just wanted to find out whether DRC is slowing down?

Okay. I'll ask Quinton to comment on.

Thanks, Dom. In terms of preowned, I assume it's used equipment. And yes, we have been successful to source some used equipment, specifically from China. However, that's also a moving commodity, as sanctions is reviewed, refined some of those products then also will be caught in the net, and then we might lose traction and not able to buy those types of equipment anymore. So yes, we have had success. We've bought quite a few pieces of equipment. It's not a major contribution to the result because it's relatively small. But it depends when -- if the sanctions change, then that source will also be closed. But currently, it is still open, although some of the product lines has been caught in the January sanctions [net].

Emmy, do you want to comment on the DRC?

Yes, I have -- all right. When you look at the [indiscernible] trading, our first half is not as strong as the second half. But bear in mind also over the period, especially in the DRC, there's been a lot of rain and impacted as well slightly the performance. However, asset [opportunities] 2022 was about ZAR 45.8 million and then compared to what we have now reported of [ZAR 62 million]. But if you look at the second half, it was quite strong.

Sorry, if I can just follow up a question. So -- just in terms of your guidance, do you think we will be taking similar to what you achieved in the second half? Or again, just clarifying whether there's any softness in that market.

So we just pay the guidance. It will be as strong as second half.