Barloworld Limited (BAW) Earnings Call Transcript & Summary

Yes. If you look at the revenue, particularly for Mongolia because it's an intercompany transaction, we didn't recognize that revenue. And then how it works for that period is that when Russia sells on sales to a customer, that's when we recognize a percentage of the commission. And then of that, during that period for 2024 financial year, the recognition for the commission was only about ZAR 2.5 million. So there's still more that's still laying in there that hasn't been yet sold. So that's how we account for it.

There's a couple more questions that come through on Ingrain. And this 1 comes from Tinashe from Laurium. So the question is with the operational improvements that you have delivered, Chris, the price increases taken and the outlook for volumes. Can you please remind us again what the medium-term margin targets are?

I think, Tinashe, we've been quite consistent in that and that we see through the cycle operating margins between 11% and 13% in the business. And I think as things stand, we should be set to getting to those particular margins within the medium term. And I'm not expecting to see those in next year, but certainly, just beyond that time horizon, we should see our margins stabilize back at those particular levels.

Thandeka Mbonjwa, First Avenue Investment Management, question reads as follows. Can you please comment on whether the cautionary statement relates to the BIS investigation?

And I think there's another one from Fraser...

There we go. So this is from David Fraser, Peregrine Capital. Last week, you alluded to give us some clarity on the cautionary. Today, I see there was no mention of this in the update.

Yes. I guess the reason I wanted to look at those 2 questions together. The BIS investigation is not related to the cautionary, and the cautionary will be updated next week. And so we can wait for the update.

Okay. Next, we've got Roy Campbell from RMB Morgan Stanley on the line. If you can unmute him, please Roy, go ahead.

My apologies. I'm still a little unclear as to what the circumstances where that led you to commissioning this investigation. So what is the exact transaction that has happened if you can just clear that up for me, please? And then secondly is on the inventory on the obsolescence provision, Dominic, you said earlier, I didn't quite get the value of what the split is between your restructuring and your inventory obsolescence, please?

Okay. Thanks, Roy. I said 25 million relates to the parts obsolescence and 5 million relates to restructuring. And I guess just on your first question, just to give you context, remember, I've been saying this Roy, every time we meet that, obviously, we'll be reviewing the sanctions regime in Russia on an ongoing basis. And the guidance I gave from the get-go when this all started, that for us is to run this business for breakeven, and the reason why I said that back then was that, obviously, we need to watch the sanctions because they will make the trading environment very difficult. And we started seeing volumes sort of restrictions coming through in terms of export control in terms of the sort of parts that we could not import into territory. And as part of our controls, we then asked the team in territory to say, could you confirm that you are following the process. And we went through -- we took our compliance team just go through that process. That's why we picked up that, in effect, there were parts that we are now impacted by the export control regimes that have come through that the team shouldn't have brought to. And I guess it arose out of that. Because its' our own investigation, we also did look at sanctions. And as Sandile said, we didn't pick up anything on sanctions. Therefore, we felt it's important that, first and foremost, self-reporting to mitigate any punitive issues with BIS can be mitigated. We said that's the route that we're choosing to go. We didn't have to go that route. But we said we have to go that route. We didn't have to go to [indiscernible] because, in our view, there was nothing relating to sanctions. But notwithstanding, we said when we appointed an independent investigator in this particular instance, the Board chose to appoint ENS. They would have to look not only just at exchange controls, they should look if, in fact, there would have been any sanctions that could have been violated. In our view, as I just say, I don't think so, but notwithstanding, it's important that those becomes verified. I think that is the background against which this have been -- and to give you a sense, in April when the war started, we're talking about 6 schedules. As of July, we are talking about well over 2,400 schedule. And that is quite volumes. And that doesn't excuse the team to have not gone through the rigor. And that's how we just said, let's test our controls, and that's how we pick it up. I hope that helps, Roy.

Now if you have found -- if you're an internal investigation, it's found to have then violated these control -- export control regulations, what is the potential penalty or fines? What is the structure in which it has to go through? And now that you've had the voluntary disclosure, does that lessen the potential impact over here?

Yes. So remember what Sandile said in the beginning, is that we notified the authority first and foremost, and they give us 180 days to then investigate. And once we've investigated, we submit a report to them. And I guess, during this period, it's very critical and important that we are thorough and make sure that we are able to disclose. And the reason why that is the case is that if you've done so, and I mean, just based on some of what we've been told by our legal counsel is that there's been companies that have sort of never gotten any penalty of any sort. But I guess, obviously, I can't determine now what that penalty will be if there's going to be any. But my hope is that as a company, having disclosed, we're hoping that the penalty is not severe.

Okay. But you don't know whether that penalty could be the value of the inventory that was as transgressed or if it's 10% of revenues or you don't have any kind of structure that we can go on?

No, no, not at the moment. And I guess, we're taking advice from our lawyers out of the U.S. and then, yes, not at the moment.

Thank you. I think that dispenses a lot of questions around voluntary disclosure. Just back on to Mongolia question from Nick [indiscernible], what is the order book for new equipment look like in Mongolia?

Emmy.

Yes. Thank you. The order book still looks very strong. We're sitting at about close to about $79.6 million as we reported close of around September last year, which increased over $100 million, but still very strong about -- as I indicated, close to USD 80 million. Thank you.

Okay. Thanks, Emmy. Nopasika question from Paul Steegers and it talks to interest costs in the second half, have these reduced?

Yes. Thank you, Paul. So indeed, the interest costs have reduced in the second part of the year. You'll recall that we had settled most of -- in fact, a larger component of the debt along, in fact, during the year. So when we get to the end of the year, we're seeing a marginal reduction in interest -- sorry, in the finance cost itself. And the reduction is really as a result of us having paid down the debt, focusing on that because as you would appreciate, the actual interest rate itself has not gone down. So you will be seeing a reduction in finance costs, albeit marginal, and then a bigger portion you'll see coming through early in the next financial year.

Thanks, Nopasika. Question from [indiscernible] Oyster Catcher Investments. Please unpack half-on-half construction equipment, Southern Africa performance and provide revenue split within equipment in Southern Africa and Andronicca?

Thanks Katie for that question. We will share the full details of the revenue split when we released the final results. But based on the historic performance between SA and the countries outside South Africa, that split ranges between 65 SA -- between 60 to 65 being SA and the balance being the rest of Africa. On construction, we have seen some improvement, although the volumes are not yet at the levels that we are expecting. There is a lot of positive sentiment coming from our customers as we engage with them of late. They are starting to see some movement in the adjudication of some of the tenders that they're waiting for. And our expectation is that in the short term, we'll start seeing some improvement in activity. Thanks.

Thanks, Andronicca. Just back on to clarity thoughts from -- with regards to the self disclosure. What is the difference in sanctions approach versus export controls violation approach? And this question comes from Paul. And I think there's a couple of questions that needed that type of clarity Sandile.

Okay. thanks, Katie. Sanctions will typically apply against targeted entities and individuals in restricted territories. And export control, particularly the U.S. export control restrictions applied to, as I indicated earlier, principally U.S. origin items that in this case, we were restricted from importation into Russia. But they also apply against items that are manufactured elsewhere, but that may contain U.S. componentry or that may have been manufactured using U.S. software technology. And as Dominic indicated how the BIS regulates export control restrictions is that from time to time, they publish supplements in which they list items that are restricted from importation into the territory. You may apply for a license and the BIS does grant licenses on application in places where there are restrictions. In terms of the sanctions, I think it will be well understood that sanctions are generally regarded as being a much more serious issue than export controls. As Dominic indicated, we are dealing currently as of July this year with in excess of 2,400 items that we potentially deal with that are restricted in Russia. And the U.S. authorities have been updating these supplements with greater frequency as the conflict has intensified. Although the investigation is underway and it will determine whether or not, in fact, these violations have taken place and if so the extent to which they have taken place, the investigation will also look at issues such as are the aggravating factors in place, are the mitigating factors in place, which will have an impact on whatever the outcome or how the BIS will view the report that we will submit. And that will all go towards whatever the outcome of the investigation is going to be. It is -- anything more than that at this stage would be speculative.

Thanks, Sandile. The next question from Brent. It says if there has been -- sorry, my apologies. If the risk of breaching export controls in Russia is high, is it in the company's best interest to continue to operate in this region?

Yes. I guess, Brent, in terms of that I think since we picked this up as a mitigation, we since told the team not to import any parts into Russia anymore. Remember, there are parts that you can still import legally into Russia. But you've got to go through a fine-tooth comb. And our view is that the risk is high. I think when I was asked the question as to how long do we think we could trade based on what we have in inventory and the addressable market, I said we could probably trade if we didn't change anything until about next year, December. So I think between now and way before then, obviously, we are in discussion with the Board to look at various options. And I guess it's important that as we do that, we deal with this matter of the investigation properly. And our view is that we should be able to make a decision. I did say from the get-go that we would look that this business doesn't lose money. If we lose money, we will -- I say that we will basically look at various options like what was your business. And then basically -- so at the moment, we're still in discussions with the Board, and we're navigating this investigation properly and we'll be able to counter with various options.

Thanks Dominic. Moving to Bartrac. Andronicca, this is for you. Why is Bartrac so weak in the second half, from Paul Steegers, Nedbank.

Thanks for that question. Yes, with Bartrac, we were busy with the big components replacement cycle. And we had already secured the contract with our expectations were that activity will continue. Unfortunately, one of our key customers since the beginning of July has been dealing with some issues with the regulator. I won't mention the name at this point because it's not yet public knowledge. And that has resulted in a slowdown in activity. It has become a bit challenging to trade. They settle us outside their offshore accounts because their local accounts are not active. But on the other side, there has been some shortage of some of the key parts, particularly related to the engine components. It is a global shortage that we're experiencing right now. And that also has caused the slowdown.

Thanks, Andronicca. Next question is from Jovan Jackson, Fairtree. Can you please provide detail on the earnout metrics. Is the total amount capped? And if so, at what amount? And this relates to the Mongolian earnout.

Yes. When we sold -- when we bought the business from Wagner, we agreed on a total of about USD 30 million earnout over a 4-year period. This was pegged on the sales or revenue of the business. And the past 2 years, you could roll out [indiscernible] $10 million. If they don't hit that range, you could roll it up to the second year. And obviously -- so, so far, the business couldn't meet those revenue metrics up until now. So basically, the $20 million is not payable. Had the business not met its revenue metric this year would not have paid. But as you can see, the business has performed and we actually have to pay this earnout to the Wagner family.

Thank you Dominic. There's a question from James, Prescient Securities. Many thanks for the call. Does the export violation involved the Mongolian jurisdiction. Also does this information affect the cautionary announcement development?

Yes. I guess, James, we've addressed the issue of the cautionary. But I did say that Mongolia, we're talking about 40 million of parts that -- USD 40 million of parts that went through to Russia.

Okay. So let's go -- there's another question here from Nick [indiscernible]. Can you comment on the news reports in July with regards to illegal trade with Russia. It seems there was a long lag between these reports and your sense dealing with the matter. What was the reason for the lag?

There was no lag, as I said, I mean the decision for us to investigate the business was long after -- long before that July -- what was the article? Insider Article, yes, I mean this was long before that. These 2 issues are not related.

I think a lot of the questions have been addressed. Just going to wait 30 seconds to see if there are other questions to come up. Here we go. So question from Shane Watkins, All Weather. Are there any additional CAT territories that you could acquire? Would you have appetite to acquire an additional territory?

Certainly, I think within the jurisdiction which you operate, I mean, I did say when we sold Spain and Portugal, we do have an appetite to acquire jurisdictions that are contiguous to our geography and the reason why we went for Mongolia. It was contiguous and there are territories that are quite contiguous to our profile of geographies [indiscernible].

Yes. I think a lot of the questions then, Dominic, that remain have been answered directly or indirectly. I don't see any other new question that -- and I think in terms of the audio questions, there's no 1 online.

All right. I guess this will basically bring us to a close. And thanks, everybody. We still have couple of days. If there are more questions, you could send it directly to Investor Relations, and we will try and quickly turn those around. And other than that, we will see most of you in November when we release the final results. Thanks, everybody.