Barloworld Limited (BAW) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Barloworld preclose trading update conference call. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Dominic Sewela. Please go ahead, sir.

Good afternoon, everybody who's online. And I have with me the key [indiscernible] Barlow from the operational side, Chris, we have the CEO of the Ingrain division, together with Emmanuel Leeka, who is the CEO of the Eurasia. I also have Steven Mdlalose who's joining in for Andronicca who's traveling and in the room, I'm sitting with Nopasika, the FD as well as the investor relations officer. Just to give you some of the highlights, I hope all of you have had an opportunity to review the trading statement that was released this morning, it's definitely pleasing to release these results notwithstanding the challenges that we are facing in terms of the headwinds from the geopolitical challenges just overall inflationary environment, which we operate under. And generally, the global economic outlook. But I must say that what has been pleasing is to see double-digit revenue growth of up to 2% for the group, largely driven by Southern Africa and Steven or myself could cover that later on, where we've seen a 34% increase on the revenues of this business. The order book has been very strong. You would have seen in the past 6 months, we had to invest more in working capital and if you're actually delivering the bulk of that in the second half and you're seeing that delivery taking place. I mean we are close to -- we've got much more days of training for this month. But I guess the 11-month previous expense give you a sense of where we are in that business. And what's also pleasing to see, we are coming very strong following the closure of the orders last year. So they're basically low, but I guess there's a lot of drive to actually increase revenue in that business, but also overall margin realization in both Mongolia and our VT business has been seasonal. You all understand that our VT operations is challenged by the war between Russia and Ukraine. And then it led to functions being posed as of the month of July -- in the middle of July. I had an opportunity to go to Russia and seeing my employees and meeting some of the key customers there. I have had an opportunity to go to Mongolia as well. And it feels very interesting to see how committed I am with staff, working in very tough conditions. There's most functions of our customers. So therefore, some customers we can't trade with, but notwithstanding that, the team has focused on making sure that they optimize the business as well as making sure that way it's possible for it to trade, they do so in a profitable way. And I guess, when you come back home to South Africa with our Ingrain business, still a tough percent revenue growth really on the back of commodity prices as well as our export business, I guess in an environment where our customers are impacted both by just consumer companies as well as loadshedding. We've seen volumes there slightly down. But overall, if you look at EBITDA, it has been impacted by basically keeping on, as you said, acquisition, that business required investments in terms of CapEx and has the inefficiencies in the plant planning sort of breakdowns are likely to expect that there hasn't been investment, but we know how to tackle. And we've invested in making sure that we have the right skills in the business, and hence, you see the reduction of EBITDA on a comparable basis. But what's pleasing is to see that our covenants are in place. The only one which has moved slightly downwards, it's really likely due to the little bit of that interest cover. And we are operating in an environment where the interest costs are high. So I'm just going to pause there and allow the questions to come in, and I will either answer the question or directly to whoever, maybe appropriate, I'll stop.

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

Yes. I hope you can hear me. I had a question on Equipment Southern Africa. Obviously, a fairly robust performance in terms of revenue growth, consistent roughly with the first half, but the margins have been under a little bit of pressure due to mix, et cetera, and profits, therefore in the second half may be down in rentals year-on-year. And the order book has obviously reduced as you've worked through those orders. So as you look into next year for Equipment Southern Africa, are you still confident that, that business can grow topline? And how do you see the margin development with mix and hopefully after sales then becoming a bigger part at higher margins? So maybe some color on Equipment Southern Africa looking forward 12 months.

Yes. Thank you very much. I think Steven is on the line. But before he comes in, I think we've had 2 years of the mission-filled growth and the environment where that was underpinned by commodity prices and the confidence of miners acquiring or replacing on machinery. And as that gets to moderate, we would not expect the same growth rate in the following year. But our view is that when that happens, the mix starts to change because our margin is very linked to that mix because we then start getting more past business because the equipment will be running. Our view that production on the mine notwithstanding the commodity prices will still continue because where it'd be overbearing removal and also mining the ore itself. But I guess, Steven, do you want to give more color to the question that was raised?

Thanks, Dominic, and thanks for the question, Paul. Certainly, the outlook for next year for our business coming out of such a strong year is still positive, but more so coming from the After Sales business rather than primary Equipment sales. As Dominic has alluded to, we definitely do still see that a lot of our customers will continue working their fleets and the commodity prices have sort of been stable to support production to keep growing in some of our major customers on the mine. And in terms of how that will flow through to our margins, we still have a positive outlook in terms of our profitability, as you pointed out that with the mix changing and After Sales being a bigger contributor and that will definitely have a more positive tilt on our bottom-line margins as well. Thanks.

That was good. Paul, does that answer to your question?

Yes.

The next question we have comes from Brent Madel from Absa.

Just a question on Equipment Russia, if I may. So after the first half performance, I think the impression that I got was that you had worked through a lot of the new equipment inventory that you had, and it was effectively going to be a much tougher second half relative to the first half. From the numbers that you released this morning, it seems as though the second half has held up reasonably well. I assume part of that contribution certainly would have come from the aftermarket parts out. But I wonder if you can just speak through the second half performance in Russia, also just in the context of having less new equipment inventory at the start of the second half.

Yes. I guess before it becomes a need -- because our -- thanks for the question. Having been there, one of the key issues that we get because we -- our view is that in terms of primary machines, we are not going to see much and that has been the case. If you look at the margin preservation, it largely comes from the aftermarket. And in preparation of this, we did stock up a lot of inventory from other dealers as well as Caterpillar before they basically retreated their stock. So -- and we are continuing to supply on that side. But Caterpillar also were still able to supply SEM. But SEM, remember, it's not like a mining type of equipment, more construction. So that is not really utilizing a lot of parts. But I think in essence, we can just talk about what we see from an outlook point of view.

Yes. Thank you, Dominic. Good afternoon, everyone. And Brent, the -- as Dominic indicated in terms of the prime product, we managed to maintain the run rate and momentum towards the end of the -- this financial year, but also what helped us a lot is the aftermarket, which with good margins coming through based so that you've seen a significant decrease overall in terms of the topline. But because of the mix and the aftermarket being stable, we are seeing the operating profit holding up and then also a very good uptick in terms of the EBITDA contribution. So as indicated, unfortunately, with the prime product, Caterpillar, as we have previously announced that we will continue in terms of the SEM unfortunately, as far August, we got that feedback from Cat, they will not be supplying SEM into the territory. We're able to stock up enough as well until deliveries until December, and then we are so seeing most of our parts as well as the SEM across in making sure that across the territory to be able to support our customers. So going forward, we do have enough stock to be able to sustain us. But also what is helping us in terms of the performance is also looking at the structure internally to rightsize to make sure that we restructure the company based on the current topline and also the challenges that we're having with other customers that we are losing to the [ sub-chains ]. I hope that answered your question, Brent?

If I can ask a follow-up question on that. So if I look at the second half performance and based on what you're saying, it's not really the new base yet?

Yes. It's not the new base yet. But continuously, we're monitoring the situation. I mean, I can just give you an example, one of our key customers that contributed close to about 30% to the business, we lost the customers for this as of August. So that will also impact the business. But also what we are focusing is other customers that are not necessarily function and then we'll continue to try and make sure that going forward, we will be sustained in terms of profitability. Although we've seen improvements in terms of losing on topline, but performance has been quite good.

To your point, the cost of this continued function. That's why even though we gave the guidance that we keep the breakeven, I think we're still far from that. And it will be very interesting to see the development next year if the work continues because I don't think necessarily even if the work would stop, the sanctions will be immediately listed. It will take -- there will be a lag. So our trading environment remains to be challenging. So from a point of trying to figure out what the true outlook of this business, it will be looking at March next year because then you can almost say, take next last year because we are coming from a higher base of a huge order book. We look at this year, still trending off the inventory that we've been able to stop par and rightsizing the business. And so I think to be realistic, you look at sort of March next year, when we give sort of a sense of where we would be in this business. But our view is that as the commitment we -- that business will not be self-funding. The business might not be using money. That's what we are committed to.

Sorry, can I just ask a final follow-up on that? So just given how well Russia has done, is there any cash accumulation in country? I would assume you're more than covering your operating costs. Is there cash accumulation? And can you extract that cash?

Yes, you could. I mean -- and firstly, you're correct because remember, we now have stronger facilities with the international banks. So we are using local banks to fund the business, but it's always prudent to fund the business on our own case. What we were trying to avoid is repatriating capital from the center into that market. You can extract cash, but obviously, it's not as easy as done previously. And then Emmy and the team are continuously and looking at -- saying what is the optimal level that the business can be able to sustain itself without trapping that amount of cash in the business.

[Operator Instructions] The next question we have comes from James Twyman from Prescient.

I just wanted to talk about the Ingrain business, which was the key weak area. The margin was around 10% in the first half, and it fell to 6% in the second half. And the commentary was fairly similar to the first half. Firstly, could you give us an idea of where the deterioration has come from just in terms of whether it's in terms of volume or internal uptime? And then secondly, on the positive side, talking about Russia, could you give us some idea about what sort of size the aftermarket is now in Russia? And what sort of size the construction business is in Russia? Because clearly, those 2 have been changing quite substantially. That's it for me.

Thanks, James. And Chris, do you want to comment on the first one on Ingrain, you want to comment on the second one?

Thank you, Dominic. Good afternoon, James and all. I think just looking at the second half, I mean, the commentary is very much been the same, James. We did see some softness in the domestic market. We continue to see a -- call it, the mix shift away from the coffee creamer sector. So those volumes are lower where we've had historically very good contribution margins coming out of those. I think we've had significant contribution. I think during the period, we have -- I mean we've continued to sustain some of the efficiency losses that we've seen, which is the difference between input standard costs and our actual costs that we're seeing in the plant because of the breakdowns, et cetera, that we've had. We continue to, I think, have some physical months going into the second half of the year, which has impacted margins and you're spot on, on the margin in the second half, which is unexpected to be much lower than what we would have had driven, like I said, about the losses that we've taken on the difference between actual and standard. We've also suffered with some of our Ingrain product recoveries in that particular period where we haven't been able to produce Ingrain product as part of our separation, which has impacted the co-product recovery that we've traditionally had. And I think also our investments in the fixed-cost line where we've made much bigger investments in maintenance capital into the business to try and arrest some of the breakdown that we're seeing have -- we made a much bigger investment there during the period. So I think largely, if you have a look at it, our revenue is up 12%, but our variable costs have gone up by about 18% in the period. And I think that has resulted in a compression and contribution. On the skills -- let's put it on the skill side, we're reasonably flat on skills and wages other than inflation, but we've continued to make the investments in maintenance and plant uptime in the business, which has also impacted the operating margin. Yes, I think that's -- I'm going to leave the commentary at that point now, other than saying we obviously are retracing the issues through our CapEx program and continuing to change the practices around maintenance in the business and key.

Yes. Thanks, Chris. Just on the contribution in terms of parts as well as construction. Construction, I must say, when you compare to the other businesses, it's quite small, below about 5% or 3% to be specific in terms of contribution, whilst mining in terms of the topline has been quite significant. But if you look at the aftermarket, particularly your question around us, which is something that is sustaining us in terms of the mix, it's above 60%. So currently, the bulk of it in terms of the mix comes from the part sales.

Mining plan, but I don't think that it's practically true.