Barloworld Limited (BAW) Earnings Call Transcript & Summary

Welcome to our pre-close trading update call where we will be engaging you on the recent SENS released this morning, a voluntary trading update for the 5 months ended 28 February 2025. My name is Nopasika Lila, the Group Finance Director of Barloworld. Mr. Sewela, our group -- I mean, our Group CE, could not be with us today. He is off ill. With me, we have our CEOs of the divisions, they are joining us as well as in the -- they're joining virtually as well as in the room, I do have a number of executives of Barloworld as well. You would have had an opportunity to review the voluntary trading update. And in the interest of utilizing the time that we do have this afternoon, I would suggest that we shift straight into the questions that you may have had or have after having reviewed our trading update. KG, shall we look at whether we do have any questions on the line?

[Operator Instructions]

Thank you, KG. Let's give the audience a bit of time to type their questions or craft their questions for us to respond to.

Okay. We've got our first question. And this question comes from Paul Steegers from Nedbank. His question is, given the profit trajectory at VT, do you expect that business to become loss-making in the second half? And the question -- Emmy, if you could step in to address.

I'm on the line. Good afternoon, everyone. And thanks for that question, Paul. As we are ensuring that we are breakeven, we will be going through a process again of restructuring. And we're planning to take [indiscernible] to about 200. That will help us in making sure that we remain profitable going forward. Activity definitely will come down. However, we are looking at ways to ensure that the division remains breakeven as we actually indicated previously. Thank you.

Thanks, Emmy. Is there a follow-up question or any other questions?

That's right, Ms. Lila. So there's a follow-up from Paul as well, and this question is directed to Chris. The question is, how did Ingrain managed to grow EBIT by 15% on flat revenue growth? What costs are being taken out? Over to you, Chris.

Thanks for the question. I think, well, I'm going to take you back to the conversations that we've had over the last 2 sets of reporting periods around the restructure that we took last year. We -- if you recall, we took out just over 100 heads in the business. We focused on streamlining the leadership structures within the business. And then we're very deliberate about driving procurement cost savings in the variable costs as well. So we've seen a reduction in headcount come through. We've seen our procurements -- or let's put it, some procurement cost savings starting to come through on, which is giving us some margin expansion. And then the other thing as well is we spoke about the efficiency losses that we were experiencing and you're seeing an improvement come through in the plant performances in the businesses. So I think overall, the restructure plans that we've spoken about as well as our targeting that 11% to 13% operating margin through the cycle. I know we're still some way off there, but you can certainly see the improvement actions really starting to take shape in the business. So I think we're seeing some pricing gains come through in the market. Volumes, I think, as indicated, are under pressure. But I think the turnaround that we embarked on last year is starting to yield the positive results for us.

We've got another question. We've got a question from Marc Ter-Mors from SBG Securities. This question is directed to Andronicca, and it says, what is the impact of unrest in DRC on clients and operations?

Andronicca, did you hear the question?

Thanks, Nopasika and Marc for that question. As you are aware, the unrest in the DRC is in the Northern Eastern part, not yet impacting the Katanga region, although there are indications that -- or expectations that what's happening there will filter down. But you will appreciate that given the instability, investors are delaying the investment decisions to determine what the outcome will be of the [ spreads ]. In the run up to 2025, we were very bullish around the parts component replacement project that we had secured, and that project has since been delayed, unfortunately. And the legislative environment there is impacting the service providers to the mining houses. So not the unrest directly, but a lot of economic decisions that are being delayed given the unrest plus the legislative environment.

Thank you, Andronicca. Andronicca, we're going to stay with you. And it's a follow-up question from Marc. He says, what triggered the stock write-downs in Equipment South Africa? Question one. And the second question is, how is the rental book performing or growing?

Yes. the stock write-down is in line with our policy. We look at inventory turns over a certain period. The fast movers there is a different classification compared to strategic stock. And we did bring components for a customer that then decided to change the maintenance strategy from proactive to reactive, and that is in Mozambique in particular. And given the period that elapsed from when we brought in the stock, in line with the policy we had to book a provision. And on rental, the rental book is growing, is performing quite well. The quality of debtors hasn't deteriorated since we've seen the growth. And this really is a reflection of a market that is the capital constrained, those that are able to pick up projects as a partner with us would rather have a service instead of putting capital to buy new equipment. A number of those contracts are on what we call ROP with an intention to convert after a certain period, normally we work on 12 months ROPs. Thanks, KG.

Thanks, Andronicca. So there's a series of questions that follow on Mongolia. The first question is, given the decline in the Mongolia order book, are you expecting a material decline in revenues in the second half and into the next year? What does the pipeline look like for potential new orders in Mongolia? That question is from Nick Webster. If you could also just indulge me to read a question from [indiscernible] His questions is, please provide color on Mongolia cost growth in the period and how this is trending? What is your expectation for the second half machine sales? Should we expect aftermarket to be a larger share of revenue in the region? And I'll pause there.

Thank you, KG. I think let's check with Emmy that you have captured all the questions.

Yes. No. Thank you, KG, and thanks, Nick and [indiscernible] If you look at the drop in the order book, as we've indicated previously, we had a significant order coming out of MAK, and we are still busy delivering most of the machines. And I do believe that in the last quarter as well, we did receive additional orders from MAK as well, but for smaller machines as well. So it's pleasing to see irrespective of our deliveries, there's still orders coming through from one specific customer. But our diversification strategy in terms of new customers, we've actually won a tender with the construction from a government tender, which is not that much in terms of the quantum, but also when I look at the other opportunities that exist, we are still awaiting a tender award for the Oyu Tolgoi underground operation. So the pipeline still looks solid. And then if you look at the overall deliveries that we have for the aftermarket, given the fact that we managed to seed a significant amount of machines. We foresee, as indicated, that currently, the aftermarket contributed about 48%. We've seen a significant growth as well in terms of the demand, particularly around the aftermarket opportunities. However, the risks still exist. With regards to the challenges that we are having with deliveries into China, we have seen a bit of slowdown, although we were expecting an increase in terms of the coal, we hope that we won't see a repeat of what we have seen in 2022. And we still remain quite optimistic that there will still be some level of continuation in terms of what we're seeing from a GDP growth point of view. And given the fact that -- if you look at Mongolia, the GDP has been doing very well. There's still a lot of demand, but the only thing that is of high risk for us is also the high dependence on China. But from the opportunity and -- the pipeline opportunities do exist, and we hope that we'll be able to capture some of the opportunities. Thank you.

Thank you. Paul, I think it does address your question. I think your point was also around the order book. His question was Mongolia continues to do very well. What is the outlook given government's -- government looking to take larger stakes in projects with [ fabulous ] returns for mining companies. So maybe, Emmy, if you could talk through the regulatory landscape to that question.

Yes. Thanks, Paul. That still remains a major concern on the ground. However, what we've seen irrespective, when most of the companies have already engaged the government in terms of what needs to be done, the likes of Oyu Tolgoi already to a large extent, comply. And the likes of MAK, we've been having discussions in terms of how -- as a family-owned business, how does that affect them being also local. And yes, it has actually slowed down a little bit of exploration activity, but also in terms of new projects on the ground. But the stay-in-business CapEx, it is actually continuing, and we will continue to monitor the situation and engaging with the individual principles for different operations to understand how do they feel with regards to what might be going forward. And then as you expect, the uncertainty still remains. However, from a stay-in-business CapEx, there's still a lot of activity, but also, we've seen 1 or 2 greenfield projects taking off, and we hope that we will be able to capture some of the opportunities after they've actually received that particular approval. Thank you.

Just then to close off on Mongolia, Emmy. Marc's follow-up question is, how large is the Oyu Tolgoi opportunity in your view?

Marc, thanks for the question. The opportunity is quite significant in terms of the underground, whether they will reduce in terms of the requirements for the underground machines, it's also, from a quantum point of view, similar to what we've seen with MAK, but also, they can stagger the requirements over the period, not necessarily deliveries same year, but maybe over a period of 2 years, but it's quite significant for us. Thank you.

Thanks, Emmy. The question from Karl Gernetzky of -- so my questions are loading to -- from Karl of News24. His question, could you please expand on the review of VT and what this will entail? If I understand it, the group was always monitoring the business, ensuring that it remains self-funded. But can today's announcement be seen as a decision to again more seriously reconsider the unit?

Thanks, KG. Thank you, Marc, for the question. So as it relates to VT and as you correctly state, we have always indicated that our strategy remains. And in that strategy, we remain operating in VT. Also, the CE has on numerous conversations indicated that our intention in VT is to breakeven, and we will continue operating at breakeven levels. On today's announcement, if you are referring specifically to the paragraph that talks to ourselves reviewing continuously options, that is still something that we are doing. We are reviewing our options in VT, and we remain firm on the ground as we speak at the moment. So in short, no decisions have been taken relating to the business continuing to operate in VT. It still remains as it has always been communicated that we remain operating in VT. So at the moment, that is where we stand as far as the business is concerned in VT. Thank you.

Thanks, Nopasika. Brent from Absa. His question is around Mongolia. Emmy, he says, revenue grew 80% in the 4 months update but only 50% in the 5-month trading to February, is this largely a function of a lumpy order book?

Yes. Thanks, KG. Maybe before indulging -- Brent on the issue of it, just to go back to the VT story as well. I think it's important that as we have explained, VT is no longer a CAT dealer, and hence, when we want to report it now, we will not be reporting it under Equipment business. It will be under industrial services. Just to bring that clarity. And whatever we are having now on the ground in terms of services and continuously managing and looking at ways we can remain breakeven. We are monitoring what's happening in terms of geopolitical situation. And so far, as Nopasika has indicated, a decision hasn't been made in terms of what else in terms of -- but we're still going to remain as it is in Russia as VT LLC and looking at ways to make sure that we can remain breakeven. Now turning to what Brent has asked, yes, revenue grew by 80%, and as we've indicated previously, it was also driven significantly by that lumpy order book. However, the aftermarket grew also by last year, if you look at last year, close to about 40%. And then we were expecting a slowdown in the aftermarket, but we have seen also for the last quarter a significant growth in terms of our aftermarket as well. That also has helped us in terms of, one, late deliveries, but also the aftermarket also helping us to maintain that growth in terms of the top line.

KG, do you have any further questions?