Barloworld Limited (BAW) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Barloworld's pre-close trading update. [Operator Instructions] Please note that this event is being recorded. I'd now like to hand the conference over to Mr. Dominic Sewela. Please go ahead, sir.

Good afternoon, everybody. As per usual, just before pre-close, we have issued trading update for the 5 months. I think last month at AGM also did give a trading update. We are mindful that at the point in time, it was just stated as we're giving more color to this trading update in terms of the numbers. I think most of you are aware that globally and locally, there's a lot of headwinds. And largely, we've seen it with most of our customers in the mining sector in particular, that the commodity downturn, they actually are impacted, but notwithstanding, given the fact that in South Africa as well, we've had our own challenges and those relating to some of the issues that we've highlighted in the trading update such as issues around the electricity supply, the logistic bottleneck, translated into high interest rates. Those are some of the issues that we are also facing because the customers are going through that, but it's also pleasing to see that Mongolia on the other hand has defied some of these conditions and largely due to the portability to China, Mongolia has actually done very well. You'll all remember just before, just literally after closing we had receive an order from an [ MAK ] that is being delivered. And there is a lot of commodities that are being exported from Mongolia to China, given the continuity of the border. But having said so, we remain to have challenges in our BT area and things, obviously, in terms of sanctions continue to be moving, tighter and tighter. And therefore, this is expressed by our [indiscernible] down 5.5%. If you exclude Russia, would have been down 4% down in terms of revenue, EBITDA, we're down 2.5% as indicated in the trading update. And I think it's important to note that in the downturn business, you still have elevated inventory that we're delivering against but [Technical Difficulty] decline as well. And that likely indicates the fact that you're not seeing orders coming through from the mining point of view under normal circumstances when we have elections in a country, the government tend to spend a lot of money in infrastructure. We're not seeing the same in the special end market. So the part of the construction work that's coming through still to the product sector and the energy sector. But our equipment business has been impacted at the revenue line. And particularly on machine sales, the parts side remains relatively strong. But I guess, from a margin point of view, there is a squeeze in that area. I'm pleased to say our power truck business has delivered pretty well. But also, we need to take into account that we go through the cycle. And to that extent of the equipment business is going through an optimized space and where Andronicca and the team are looking is how best to optimize, but be mindful that in cycle it also turns, you don't want to make sure that you cut the muscles in that business but [indiscernible] that you need to address. And already spoken about Eurasia, Mongolia, significantly up 40%. But it's also important when you talk about Mongolia is the base at which you're looking at because in 2022, it was a low base. There were exceptional items that related to the part sales in the business. That has reversed now that you're actually seeing activity and I've spoken about BT. And, by and large, that business reflects consumer confidence and given the fact that consumers in South Africa, in particular, are quite challenged. We've seen some of our customers domestically reducing their volumes whether it be alcoholic beverage, spray drying, confectionary and paper sector and exports delivered to our expectations given the fact that we had bottlenecks in the line. So I think overall, I can go on and talk about the stuff that we have no control over. But I think from a control point of view, what we need to focus on is the lever that we can pull. To that extent, [indiscernible] in the Ingrain business, we continue to invest in the CapEx. The business is more on the fixed mode to make sure that we are able to reach a trajectory that we've looked at. I think given the fact that we have got a very high interest rate environment, the focus for us as we go through the downturn is to lease the cash out of working capital in the equipment business and focus on allocating capital to paying down the debt. And then obviously, from a strategic point of view, our fix optimized growth strategy remains unchanged. And to that extent, I will pause here and take any questions that we have and I have some of the executives of the divisions in Equipment South Africa, Eurasia as well as Ingrain with me and I've got the FD in the room with me as well. And we can take questions. Thank you.

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

Dominic, I hope you can hear me. I'm struggling to hear you. Can you hear me properly?

I can hear you very well. I'm sorry. Can you hear me now, Paul?

It's a little bit better, yes. Thank you. Dominic, and thanks I have two questions. Starting with Equipment Southern Services South Africa, Southern Africa. You mentioned that the margins in parts, aftermarket parts is under some pressure. I'm just wondering if you can talk to that a little bit more in terms of the pricing environment and why there's some pressure there. And then also on the service levels, the aftermarket service, the productivity is a bit lower I'm just wondering, given you've been focusing a lot in getting more of those maintenance contracts in with customers, preventative maintenance, et cetera, why the service productivity is so much lower as well. So just -- yes, that's the first question on Equipment Services South Africa.

Yes, Paul. I'll just hand over to Andronicca. I think we've seen it over the last 17 years that I have been involved with this business, that whenever you have a downturn, you do get pressure from the customers saying they're going through a pain. And therefore, they expect us to assist in some other areas. And obviously, you don't want your customers to be packing their trucks to an extent that they remain productive in their minds, reworking some of the stocks or working overburdened, we do end up, do compromise and say, okay, fine, in this market, how do you come in and obviously, the margin becomes an issue. And then maybe, Andronicca, do you just want to comment on the productivity side?

Yes. Thanks, Paul, for the question. So about 25% to 30% of our workforce is technicians. Those are people who are still intact by touching the equipment. Now what we see in the slowdown, particularly in the whole platinum iron ore space, we're seeing machines in part and therefore, although over the years, since 2020, we have seeded more equipment, and that equipment has been parked and sales and maintenance is required. But we -- for now, we've taken a view that it takes large [indiscernible]. As Dom said, we don't want to be cutting the muscle and we're still keeping those technicians with the hope that when things [Technical Difficulty] but we will be assessing as we progress to see how the market evolves. And on the margin side, as I can add, Dom did mention that pressure with customers pushing back on inflationary adjustments. That is mainly in the space of large global account customers where the price adjustments that we expected to kick in late last year, we pushed out, we are still in negotiations to get some of those cost cuts improved. But given what these customers are going through at the moment, it's becoming very difficult actually to conclude the negotiations in the time lines that we had hoped for.

Thanks, Andronicca. My last question is on Ingrain. You've talked about a restructuring process to lower the fixed cost base. Can you talk about that in terms of how big a proportion of the costs are fixed costs? How much cost savings would you hope to achieve from the process? And are there any exceptional costs that you think will be incurred to drive this restructuring process.

Yes. Well, because -- I mean, I'm respectful of the negotiations that we are having with the labor units currently [indiscernible] Section 189, you'd appreciate that we engage in good faith with the negotiations. I would rather be fair. No matter if I don't have an answer, [indiscernible] when we see you again in May, we had progress the discussions because it's to go through Section 189 in this environment where just generally the country is going through. So if you don't mind, I'd rather not get into that.

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

Thank you. Good afternoon, everyone, and thank you for the update. Two questions as well, if I may. The first one is on the Ingrain business. Could you provide any further update on the progress with the resolving the plant issues or the mill issues that were there before. So in other words, to what extent were the flattish volumes due to supply hindrances or only due to consumer weakness? And then the second question on the equipment, particularly mining equipment, order book down quite a bit in Southern Africa. Can you comment further on what you see in the pipeline in potential new orders for new mining equipment?

Thanks, Marc. I'll start with Chris, and then Andronicca will cover the second part on the outlook. Chris?

Paul, thanks -- sorry, Marc, thanks for the question. I think just in terms of volumes, we are seeing a bit of a slowdown in demand. It's probably being more on the demand side than on the supply side coming through. We have seen us holding some inventory levels in the business, which I think is a good thing because it means that we're able to satisfy customer demand out of inventories rather than setting production slots. So I think we have seen some stabilization in the front performance. The other area that is also impacting volumes or holding back volumes has been our ability to export through the port of Durban that Dominic alluded to earlier and also just very soft international starch prices at the moment.

Thanks, Marc. On the order book pipeline, I'll just give you a view on the big opportunities in Southern Africa that we will be break even. In Namibia, there is gold mine project that we are chasing. We're expecting a decision to be made towards the end of this year and -- so it's something that's not in the order book by the way, it is a project we are actively chasing. Similarly, in Botswana, there is a coal mine project and the good thing that coal mine is that for domestic consumption to power their power stations, it's an opportunity that we also see specifically. I think there's another coal project that we were looking at, license issued, but there's negotiations around update agreement. So again, once that is concluded, it's something that we are hoping that would come back to a level. And then in Zambia, Mopani is in the process of restarting that mine. It has been under care and maintenance for some time after Glencore pulled out, they've secured new investors. And again, another area that we chasing, Mopani in the past used to be a key client for the Zambia operation and if that project kickstarts, we're hoping that will also get a fair share of the purchases in the industry space.

Our next question comes from Brent Madel of Absa.

Dominic, unfortunately, the line for me wasn't that clear, but I would like to just go through the issues again about the lower operating margins within the aftermarket part of the business within Equipment Southern Africa. And just to clarify, so if you can just clarify the point with regards to the technicians and the productivity around technicians, if you wouldn't mind?

Andronicca, do you want to speak. Brent, just to say if you can hear Andronicca. Can you hear me, Brent?

Yes. That is much better.

Thanks, Brent. Can you hear me?

Yes, thanks for mentioning, Andronicca.

Yes. So earlier on, I indicated that 25% to 30%, it depends on where we are in the cycle of our workforce is technicians. These are people that are on our payroll. We pay them the salary and they charge time as they work on the equipment. Given the fact that we've seen such a rate of machine free parts, particularly in areas that are impacted mainly where the commodity prices have dropped, coal, platinum and iron ore and we find that we've got more hands but less machines to touch at this point in time. And that is impacting our operating margin because under normal circumstances, they'll be working on the machine and the time spent against the general [Technical Difficulty] that that's been recovered for the maintenance way.

Andronicca [indiscernible] the cyclical environment, you sometimes are quick to cut the cost and [Technical Difficulty] it takes a while to actually recruit and find technicians, particularly if they've been through a process of retrenchment and they become skeptical to come back to the organization. Our view is that we always try and hold on to them because it takes a lot to invest in technician. I think that's a point that was indicated.

If I could just ask a follow-up question just related to that. Just in terms of your activity levels, particularly as I said, on the aftermarket side, to what extent is that being impacted by the knock-on effect related to the Transnet and rail issues that the miners are feeling. I mean, are you seeing a close correlation there between your activity levels and the disruptions caused by the rail lines?

Yes. Definitely, South Africa is impacted the most, if you look at the overall region. And over and above softer commodity prices that you see, we know that in South Africa, we've got added domestic challenges in Transnet. A number of our customers have engaged us on plans to slow down production on the basis that they ran out of space to store it up. And yes, what you see here it's a reflection of the Transnet impact plus the commodity prices.

If I can just ask two further questions. One, if you wouldn't mind commenting on the high margins within Equipment Mongolia, just the reasons for that high level of margins? And any indications of whether you think this may be sustainable in the short term? And just my last question, you paid down ZAR 1.3 billion worth of maturing debt. I just wanted to know whether you could comment on whether this reduces the likelihood of you paying a special dividend later on in the year?

Yes. I guess let me get Emmy first. Emmy?

Yes. Thanks, Brent. If you look at the performance of Mongolia also supported by the aftermarket, which had more than 20% growth. But if you look at the machine sales as well, we had more than 40% growth, and hence, with the margin realization, good discipline in terms of cost control. We are seeing very good margins now. Going forward, we will be delivering more machines. As indicated previously, we will start seeing that high margin coming down, but also stabilizing at a relatively higher op margin.

Okay. I think Brent, I think we got to be realistic because the privatization for me is that in this current environment way, interest rates remain very high. My priority is to say from a gross debt point of view, I'd like to optimize pay down the debt and to a level where it gives us a margin of safety to operate in the [indiscernible]. I think it's realistic to rather talk about not special, but we've got a dividend policy that will cover normal dividend. But I think we -- it's safe to say, I wouldn't be thinking about -- obviously, the Board can take a view. But my view is that specials, I don't think it's something that I can think about.

Our next question comes from James Henry Twyman of Prescient.

Hello. I've got three questions. The first one is, could you say what the cash balance is now in Russia because you must be generating significant cash now and whether there's any plan to repatriate that? And if you did, where would it go to?

Yes, James, I think one of the key issues that we had mentioned, I mean, because of the tightening functions, we've utilized the cash to procure inventory to be able to sustain us during this environment. I mean but this indeed of our ability to be able to procure that inventory. So as we are unwinding the inventory, then we won't be fluctuating the test. But fundamentally, remember what I said to Brent now, my priority in this environment, I mean, depending on what your outlook is in terms of interest rates in South Africa, in particular, if they have been at this elevated levels, much more accretive, once you consider certain equity debt ratios to make sure that you pay down the debt to an optimal level. But fundamentally, remember, also we said we do not want to be funding the Russian business, it's got to be self funded, but we also don't want to be sitting out of cash if it's not able to utilize to fund activities. Yes. And it's difficult to just speak on the BT business because it's an ever-changing environment. I think within 2 weeks' time, the sanctions would just keep tightening and -- but I think suffice to say, currently, that's what we're generating cash flow.

Okay. So can you say what your cash balance is in Russia?

No, I am not going to disclose. I'll be able to disclose that as per the usual once we disclose the audited numbers in May and then we'll be able to give the disclosure.

Okay. And then my other question was just in terms of Mongolia. Is there any sort of order book number you can give us? Or is the order book growing just in terms of understanding the sustainability of this very strong revenue growth that you've managed?

I think when you look at the order book that we've quoted there for Eurasia, the part of it, I mean, because that's not a book to really talk about in BT because it's really the [indiscernible] to Mongolia.

Our next question comes from [ Michele Hamedi ] of Business Day.

Thanks so much, Dominic, for the call. I know you say to Dominic get into the nitty gritty of it, but could you please give clarity around the rationale that led to the Section 189 at Ingrain, the time line as well as the number of people that are currently employed by Ingrain?

Let us say at the moment, we can't disclose that, but we can understand when you look at the consumer industry in this environment and that most of our customers are impacted as well because we're selling to the manufacturers. And therefore, in the high interest rate environment, I think that is therefore, there will be people in the hundreds even as we employ a lot of people, but it would not be less than 100 people are impacted. I can't say at the moment the exact number because we are going to consultation in terms of the people that are impacted. And hence, if you understand Section 189, you're going to go through the process. And of course, I cannot preemptively say. So rather that discussions are allowed in the team because I don't want to be reading about it in the front page of a newspaper when I'm engaging in qualified discussions to find alternatives as we can say what is the [indiscernible].

My question was how many people are currently employed?