Datatec Limited (DTC) Earnings Call Transcript & Summary

Hello. Good afternoon, everyone. I am sorry we're a moment late. We are presenting our full year FY '21 results, 12 months ended February. The agenda today is I'm going to go through a quick summary of the key features and highlights of FY '21. I'm then going to hand over to Ivan to go through the detailed financial review, and then I will be back to cover a review of the operations and then closing with our prospects and outlook for the year ahead. So if I could jump to start with slide, what is Slide 4. Our revenues fell by just over $100 million; however, revenues in LatAm alone contracted by more than $160 million. So without this regional decline, we would have actually shown revenue growth. Overall, we had a resilient performance in a year of poor overall macroeconomic fundamentals, but we saw many areas of technology expanding. Our EBITDA -- sorry, gross profits fell by $50 million, largely reflecting the mix change as Westcon International grew, but Logicalis reduced. Our EBITDA remained solid, especially so when considering the one-off tax benefit last year of $14 million from Brazil. The better performance in the rest of the world outside of LatAm, where we have 35% minorities, drove a better P&L and UEPS, underlying earnings per share, rose by 37%. We are resuming our ordinary dividend after 5 years. And it's going to be ZAR 1 a share or approximately USD 0.07. Overview. Last year was very unpredictable. However, many areas of technology were leaned upon to support the rapid reconfiguration of many businesses to accommodate remote working as commuting stopped for most employees. The changing business mix -- sorry, our changing business mix is growing -- sorry, the changing business mix in our business is growing our software and services contribution to close to half our revenues. This is helping to improve the working capital profile and cash generation of the business. We reduced operating costs during the year and renegotiated banking facilities with more favorable terms and at lower interest rates. We are seeing a structural change in the nature of our business. The growth in software and services is increasing our recurring offers and driving annuity revenues. Ongoing pandemic uncertainty will mean that many of last year's trends will continue this year as recovery takes hold in many countries. We see a permanent new level of demand as digitization has accelerated many organization shift to network cloud infrastructure. We have diverse market and geographic coverage, enabling us to be defensive while positioning for a broader-based recovery. Given the intermediary nature of our business -- businesses, sorry, our levels of service, brand recognition and trusted relationships with customers, these are all very important. Our business tools and [indiscernible] [ advanced ] systems support our high levels of service around our core practice areas. We are seeing a shift in our business towards more software and increasingly recurring revenues. I'll hand over now to Ivan to go through the financial segment.

Thank you, Jens, and good afternoon to everybody in South Africa and the U.K., and good morning to those in the U.S. The solid operational execution and delivery on commitments from the prior financial year continued during FY '21. under vastly different circumstances to the -- compared to the previous financial year. The group delivered strong financial results and a much improved cash and liquidity position. Moving to Slide 9, the financial performance or the income statement. During the year, the volumes of software, software services and cloud computing solutions, which include infrastructure-as-a-service and software-as-a-service in the group have grown in significance. As a result, the group revisited the revenue recognition as agent or principal for these arrangements, leading to the decision to restate revenue and cost of sales in the previous financial year. This slightly margin-enhancing restatement did not impact on gross profit or any items below gross profit in the income statement. And hence, there was no impact on earnings or earnings per share. Equally, there was also no impact on the balance sheet or the cash flow statement as a result of this presentation change. On a like-for-like basis, revenues reduced by 2% from FY '20 or 0.7% in constant currency. Operating costs were very well controlled. $22 million of restructuring costs were included with the bulk of these costs incurred during the second half as the COVID-19 pandemic intensified. The bulk of these costs were incurred in Logicalis, which is our most people-intensive business. It is important to note and to remember that the FY '20 results benefited from a $40 million one-off tax credit in Brazil as well as $7 million of interest income on this tax credit. Finance costs significantly reduced from the prior year as debt levels reduced and new financing facilities were entered into at more attractive interest rates. Underlying earnings per share were up 37% on the prior year. Slide 10, the segmental P&L. We produced a very pleasing performance in all our divisions despite very difficult market conditions. The reductions in Logicalis EBITDA were mainly due to the $14 million indirect tax credits in the prior year and currency translation in the current year, mainly from Latin America. The Westcon financial performance was very robust, delivering both revenue and EBITDA growth, building on the strong momentum from the previous year. Analysys Mason once again had a very strong performance. Revenue and gross profits contribution by geography, Slide 11. We continue to see an increased revenue and gross profit contribution from Europe with a reduction in Latin America. Slide 12, and this is a new slide that we're presenting. We're showing a revenue analysis of hardware versus software and services, including annuity. So as the business is becoming less asset intensive, software and services have grown significantly. Hardware is expected to fall below 50% of the revenue mix, which will assist with structural improvements to working capital over time. Balance sheet on Slide 13. The balance sheet continues to remain strong, driven by solid working capital management and fundamentals. Collections from our customers have remained in line with prepandemic historic norms, and our suppliers have assisted their channels by providing extra payment days in certain instances during this year. In addition, in the second half, we refinanced our major financing facilities in Westcon Europe and Westcon Asia, providing additional liquidity at enhanced terms. We also successfully renegotiated future covenants in our Logicalis financing arrangements to ensure even more future headroom. These were major achievements in the current difficult credit environment. So overall liquidity is significantly enhanced from the prior year-end position. Slide 14 presents the segmental balance sheet and worth noting that net debt reduced significantly in both the Westcon and Logicalis divisions and cash increased in Analysys Mason. Cash flow statement, Page 15. We had very strong pleasing operating cash flows during the year driven mainly by improved working capital cash flows. This resulted in an improved cash position and enhanced liquidity. Please note that the prior year cash flow statement had been restated to remove bank overdrafts from cash and cash equivalents in the cash flow statement where such overdrafts were repayable on demand under certain circumstances, but not unconditionally repayable on demand. These cash flows are now shown under cash flows from financing activities. There were no balance sheet reclassifications as a result and the overall net cash and net debt of the business remains unchanged. So basically, in substance, nothing has changed. It is purely a reclassification based on a strict technical interpretation of the legal form of these banking arrangements. I will now hand over to Jens to cover the remainder of the presentation.

Thanks Ivan. Moving on to the Logicalis Group and to Slide 18 highlights. Revenues fell by 14%, and in constant currency were down by 8%. We had to cope with numerous headwinds last year, driven by lockdowns and customer delays to large capital equipment projects. As organizations rush to enable remote working and enhance security, they delayed longer cycle infrastructure projects. This was more acute in Latin America where the currencies also sharply depreciated. We've seen some pickup in planning for large infrastructure projects and continuing network demand has put pressure to upgrade capacity. We are focused on accelerating our cloud migration and services provision, especially around Microsoft Solutions. We made further cost reductions in the latter part of the year and continue to improve working capital with lower levels of debt. Next slide, 19, revenue and gross profit by geography. The most significant hit to revenues came from Latin America with Brazil, especially beset with one of the worst pandemic outcomes. Significant currency depreciation and a worsening economic situation has taken as toll also in Brazil. We expect this dynamic to change but with gradual improvement this year. EMEA revenues grew by 5%. This was largely driven by resilience in Germany, while North America contracted by 17% and Asia Pac contracted by 7%. The decline in gross profits closely mirrored revenues overall falling by 17%. EBITDA by geography. The fall in revenues and gross profit in most regions was cushioned by a corresponding drop in operating costs, which supported adjusted EBITDA. The exception was Latin America where significant currency weakness eroded the value of local currency EBITDA and profits when converted to U.S. dollars. Adjusted EBITDA fell 23% overall to $96 million. Revenue by segment and product revenue by vendor. Sales of hardware products now represent less than 50% of the revenue mix for the first time. The biggest proportional increases have been in annuity managed services and software revenues, which tend to repeat. Cisco revenues will still have a large hardware element reduced as sales were lower for large infrastructure projects across the Americas. The other category includes mainly software vendors such as Microsoft, and these grew both relative -- both in relative and absolute terms. Working capital. DSO days increased modestly, while DPO days grew by slightly more. This was mainly in agreement with suppliers last year in order to extend customer credit during the more challenging stages of last year. We have managed down our current assets as volumes, especially in Latin America reduced. The overall result was significant improvement in networking capital, which fell by more than $100 million. Outlook. We are seeing some encouraging signs in terms of order intake and our backlog increasing. The elevated use of networks and hybrid office configurations to support remote working will continue. This is going to require a new cycle of network enhancement and capacity upgrades. Both public and private networks will need to adjust as next-generation of wireless technologies and 5G become more prevalent. All of this is being underpinned by accelerated digitization with increased use of the cloud. While our challenges remain in some regions, and markets such as Brazil, the overall picture is supportive of stronger business growth and rising consumer spending. I'll move to Westcon, Slide 25, highlights. We had an exceptionally strong year in Westcon, with the contribution improving from all regions and solid revenue growth in Europe, our largest market. There has been a marked shift to a far greater software element in our business mix, which in turn increases the repeat nature of the business. What has fueled this growth has come largely from our growing portfolio of leading security vendors. This structural change is expected to continue and reduce our working capital demand longer term as the business becomes less asset-intensive and physical inventories decline. Revenue and gross profit by geography. Revenues held up everywhere with solid growth in Europe and Asia Pacific. The biggest increase in gross profit contribution came from Europe, with an increase of 9%. Overall, revenues and gross profit grew by 5%, with revenue growth in constant currency at 4%, reflecting a slightly stronger euro and pound over the year. EBITDA by geography. All regions delivered solid pre and post restructuring EBITDA. Even with $8 million of COVID-19 and fundamental restructuring, EBITDA grew by 12% on an unadjusted basis and over 30% prerestructuring. Central costs continued to edge down and are now being below $30 million per year for 2 years. Any improvement from the regions delivers real leverage as the relatively fixed central costs can now scale. Revenue by business unit. Customer and technology categories. Our Comstor Cisco division remained in the 40s percent, reducing its weighting slightly as a lot of enterprise and public network infrastructure was delayed as a result of on-site working restrictions. We have seen a turnaround in this situation this year as there is pressure on networks everywhere to upgrade and accommodate increasing traffic. The catalyst to this has been the growth in our Westcon division, which provides many of the security and edge access solutions for remote working, unified comms and cloud services. There was resilience in all our customer categories, but with the growth coming from our largest customers, which is often the case in periods of market uncertainty. Larger companies keep investing. Slide 29. This is the technology and revenue by segment slide. The 2 most transformative commercial changes to the business over the past few years has been the rise of security solutions and a growing software percentage as a category of what we sell, both are major parts of the business. Most security products have a high software component but also the growth in software defined networks, unified comms as a service and the rise of Team, Zoom and Webex are all behind driving this. We see this trend continuing, but of course, there will always be core hardware and infrastructure. It's just that the value is shifting more towards software and as a result, added on add-ons thereafter services. We think these elements will soon drive the majority of the business. Cisco is the only vendor to operate in all of these technology categories. Working capital. The growth of software and services in the mix is favorable for working capital as less physical hardware inventory is kept. Lead times are reduced, and electronic transactions increase. Growth in trade in the latter part of the year increased our absolute level of receivables, but the payment days we managed were very good. We balanced our payables to match the increase in receivables, which allowed us to reduce net debt by $30 million year-over-year. Outlook. Wrapping up on Westcon. We expect the positive cash generation to continue as the business streams continue to move in favor of greater software and with less hardware in the mix. We operate in many small and mid-sized markets that is attractive for our vendors and large customers, but has created challenges in gaining leverage. Our systems and processes are now helping us achieve that scale. We think that the new normal will be a hybrid office environment going forward with reduced commuting and an acceleration of digitization and continuation in demand for networking. Analysys Mason highlights, Slide 33. Another strong financial performance; and fourth successive year of revenue and profit growth. Even though consulting businesses generally need to operate from clients' premises, the company has successfully operated remotely on almost all projects last year. We had a particularly strong performance in Europe with Germany especially, and this drove the strong revenue growth of 25%. The jump in valuation in this division meant we had to record a higher equity compensation charge, but notwithstanding that, EBITDA rose. The business has more scale now, and we're aiming to reach $100 million in revenues -- annualized revenues in the next 3 years. Slide 34, financial performance. We had a particularly strong performance in Europe, as I mentioned, in Germany, especially, and this drove the strong revenue growth of 25%. The gross profit growth was even more impressive, rising 30% as productivity utilization increased. EBITDA would have increased further, if not for the larger IFRS 2 expense. The outlook for this division remains robust. Telecommunications service providers and enterprises are having to invest in core network infrastructure upgrades to meet the demands of accelerated digitization. The new order emerging from the pandemic is one where networking for cloud access, business transactions and individual communications will become more prominent. I'll end now and finish with some closing remarks. So prospects and outlook in summary, Slide 37. The path of the pandemic and environment in many places remains uncertain. However, most economies are expecting growth this year after significant contraction last year. The spurt in demand in many sectors from automotive to consumer electronics has put enormous pressure on semiconductor suppliers worldwide. Our businesses are in good shape everywhere with stronger balance sheets and improved liquidity. By taking responsible actions and focusing on execution, we have performed well. The secular trends in our industry are very favorable, and we need to maximize this opportunity while ensuring we continue to adapt the group for next-generation technologies and services. So that concludes the presentation. I'll hand over now to Fred to manage the conference call participants. And we will take and answer any questions.

Thank you very much, Hans. At this point in time, I do not have any questions on the webcast. [Operator Instructions]. Yes, there are no questions appearing on the webcast.

We don't have any other Q&A means, right? Everything on the webcast, correct?

Yes, that's correct. So if you want to give some final closing remark and anybody wanting to pose questions, can send it directly at the e-mails provided.

Yes. No, well, just thank you for your attendance. And we'll be reporting as usual in October for the interims, and we're going to be, of course, on a road show for the rest of this week. And if anybody has any subsequent follow-up questions, they can get hold of us through [indiscernible] or direct to our published details of Datatec.

Jens, apologies. I just have some questions that have popped up now. Are you still okay to take them?

Yes, of course. Of course.

All right. The first one is from Richard Williamson from Edison, asking simply what percentage of revenues are recurring.

Well, we break out contractual annuity, but we don't -- but we also have revenues, which are recurring in the sense that unless the customer stops using the technology, then they're recurring by nature, even if they're not -- even if they're not recurring contractually. So that recurring revenue streams versus annuity is most probably across the group somewhere between -- especially close to 20% of the business.

Thank you. The next question comes from Franca Di Silvestro. Asking 3 separate questions. The first one being, can you provide a more detailed breakdown of the $7.7 million restructuring costs in Westcon and the [ $14.2 million ] in Logicalis?

I hand over to Ivan to answer that. But just in proportion, the $7.08 million versus $14 million in Westcon versus Logicalis directly correlates to the size of the workforce. In Westcon, we have just over 3,000 employees. And then in Logicalis, we have approximately 7,000. So it's more than double. So you could see that relationship or proportion in the remodeling, restructuring that occurred last year. Ivan?

Yes, sure. Thanks. Yes. So I can provide a bit more granular detail. So let's take Westcon first. So the bulk of the Westcon restructuring, as you would have seen from the EBITDA charts happened in Europe. And in particular, the European business undertook a series of initiatives to drive improvements and efficiencies in organization design, consolidation, processes, automation, optimization of systems to support the sort of the new environment. It included relocating roles to be closer to the customer. And in particular, it also included a reduction of roles that were doubled up during the period when the functions that were previously outsourced to Genpact as part of the historic BPO process were brought back in-house. So you'll remember a couple of years ago, we spoke about the fact that we had to double up roles in terms of reversing the BPO and some of those roles have now been removed. So that in a nutshell is the Westcon narrative. In Logicalis, Jens has mentioned that this is clearly our most people-intensive business. Circa half of the restructuring costs in Logicalis happened in Europe, and this was really pretty much as a result of sort of the pandemic and streamlining our business, continuing to outsource some of our functions that were previously incurred or conducted in Europe to sort of to South Africa. The U.S. was the -- sort of was the second biggest component, and there we removed management layers to streamline the organization, and there was also a component of offshoring to South Africa and the rest of the costs were incurred in the other regions. Lat Am had a restructuring amount reasonably similar to the U.S. or maybe ever so slightly lower, but that was also really just sort of rightsizing structures as a consequence of the pandemic.

So we expect that the remodeling actions that we've taken in the past year, most have been in the latter part of last year, were well planned over time with a view to what we consider the businesses need to look like going forward. They were not real-time kneejerk reactions to just try and reduce costs. We kept away from that completely last year. And we've only made changes that we think are fundamental to what we think the businesses need to be -- they need to be configured going forward.

Exactly. So essentially organization, structural redesign as a direct consequence of the pandemic.

Thank you, both. The second question from Franca is under what conditions are overdrafts repayable on demand?

So basically, sort of -- it would essentially be if an overdraft that's considered repayable on demand is if the bank can call it at any time, and you need to essentially then settle it sort of immediately. The overdrafts that are not -- that are not unconditionally repayable on demand, but are -- which are repayable under circumstances would be, for example, the bank can call the overdraft is, if there, for example, is a event of default, et cetera. But typically, in such an environment where such an overdraft would be called, there would be a period of time. So it wouldn't be sort of unconditionally and almost instantaneous. And the accounting literature that sort of that basically informed this highly technical interpretation is essentially an IFRIC statement that was issued to clarify this point a couple of years ago. And at contention or one of the examples that they cited was an overdraft that could have been called forged sort of within a period of 14 days, and that was not considered an on-demand sort of repayment. Sort of in substance, all of our overdrafts form an integral part of the group's cash management systems, which is one of the core criteria for meeting the cash flow definition under IAS for cash and cash equivalents. But although the substance of the overdrafts meet the criteria, the legal form that they're not immediately repayable on demand or the bulk of them are not immediately payable on demand means that they cannot be included in -- or they shouldn't technically be included in cash and cash equivalents. As I said in my covering notes or in my covering -- initial comments, this doesn't change the balance sheet at all. Overdrafts are still disclosed as overdrafts. So no change to the balance sheet, no change to net cash, net debt. It is simply geography in the cash flow statement between cash and cash equivalents and financing activities.

Thank you. And finally, does Analysys Mason remain a good fit for the group?

Well, I mean, we often get asked this question. And I think our answer is going to be consistent with the past. I mean we get -- whilst there's not direct commercial rubble for exploitation of Analysys Mason in the other group divisions, there's definitely a rubble and a positive halo effect in terms of orientation of the businesses, the type of customers we deal with, i.e., service providers and telcos. And very often, as is the case now with 5G, we get a lot of sort of looking around the corner in intelligence and business know-how. And there is an unquantifiable, I guess, spin off or halo effects, as I said, from that in that regard.

Moving online, it's a double question from [indiscernible] as well as Mudiwa Gavaza from Business Day, asking if you could give some color on the impact of ship shortages -- chip shortages as well as any other component constraints.

Yes, the chip shortages. I mean there's a cocktail of things that conspired to create this situation. Firstly, there's been, maybe some of it will be reversed now, but there has been a rise in protectionism and certain trade barriers in the last 3 or 4 years. I mean that's not new. That's been East versus West or U.S. versus Asia, whatever compartment, you want to put it in. There's been a bit of that. Then of course, we've had the pandemic of the last year, which has also been disruptive to trade flows and transportation basically. I mean obviously, there's been a reduction in air traffic, and there's been a reduction in freight and so on. So that's been a contributing factor. And then along with that, you've had -- which has really manifested itself over the 6 months or so, you've actually had some positive shocks in some industries such as automotive, consumer electronics and the like, where there's been elevated demand, certainly, elevated demand over what was expected, let's say, for this time last year. There's been a spurt, obviously, in online activity, which has most probably driven a slightly different behavior amongst consumers that have time to spend perhaps on gadgets and other nice things, including cars. And all of that, I think, has conspired to create now this -- all these things have come together, increased demand, issues with transportation, rise of some trade barriers. And I think it's all conspired to create this situation. So it's not really -- the bulls eye of this issue doesn't really rely in our industry, even though we're in technology. It relies on those other -- it's been created, I think, by those other drivers that have resulted in those shortages impacting all areas of industrial, electronics and computing and the industry that we sit in as well, of course. So we've seen some of that. Obviously, it's much greater the impact on semis. If you're a hardware business, of which we still have, even though there's been a lot of talk today about the rise of software and services and the shift away from hardware and so on. When measured by the kilo at a physical level, we must probably still shipping as much -- maybe not as much, but as close to as much hardware as we've ever shipped. So obviously on that half of the business, where we are -- where there's large hardware component, yes, clearly, there's semiconductors everywhere. So we have seen some delays and some slippages, but we're not -- it's nothing maybe more -- we will see more in the latter part of the year. But we're -- within our means, we're well stocked. We have good visibility in terms of the needs of the customers. So I would say at the moment, there's a mild impact, and it's most probably -- it's been like that since the end of last year.

Thank you. And just a follow-on on that is, will the software business growth be enough to offset the hardware decline or chip shortage impact for the group?

They are 2 different questions. The shift in our business has got nothing to do with shortages in semiconductors. That's just predicated on the reasons I laid out before. So that's just a supply and demand dynamic. The shift from software to hardware is not one replacing the other or one at the expense of the other. It's a change to how IT is being used and consumed. That's what's changing it as more hardware moves or infrastructure moves into the cloud, and/or dedicated data centers and other areas where infrastructure is provided -- is provisioned. That's resulting in a density benefit or scale benefit for hardware, which means you can employ much greater power storage capacity per footprint per square meter than you have in the past. And that density increase is resulting in -- it's been going on for decades. But it's just -- it's accelerated recently, obviously, driven by cloud and other software technologies, which means that an increasing part of what we sell is now in the software world and not in the hardware world, but it doesn't -- it's not one at the expense of the other. It's just -- there's just most next-generation technologies are -- have much greater software component, and that's how they're configured. And we are now seeing that increasingly in our spread of business or businesses.

Thank you. Steve Minar from [indiscernible] asking how much more working capital could be released in Westcon over the next 2 years?

I'll hand over to Ivan, but we might -- it all depends on growth. I mean we might actually go through a period where we have to increase or absorb more working capital to fund growth. That's got nothing to do with hardware or software. That's got to do with funding your receivables and growing your debtors. But I can hand over to Ivan on the structural side. But on the structural side, there's more to get out of the -- there's more to get out of the business model.

Yes, absolutely, Jens, I think that's spot on. In terms of the comments that we made during the -- sort of the formal part of the presentation, we have indicated that this shift more towards software is expected to have structural improvements of over working capital over time. But that's not necessarily going to happen immediately. We did indicate that will happen over time. And Steve, with the distribution business, which is obviously quite working capital-intensive as the business grows, it typically consumes cash and sort of on the way down, the business is typically cash generative. But that said, this year, even in a year of reasonably good growth in that business, we sort of -- we significantly reduced our working capital, and we also showed quite a nice reduction in the net debt in that business from the previous year. So just in terms of general themes, yes, structural improvements expected in terms of -- or as a result of the mix change. But you need to balance that with working capital consumed to fund the growth at the end of the day.

[indiscernible] from Perpetua. Given the excellent cash generation and increased liquidity, are you going to reinstate another share buyback program?

We don't have any. We'll continue to monitor it. We have the means to potentially buy back shares, but we're not currently share buyback [indiscernible]

Thank you. From Muneer Ahmed from Prescient. A couple of questions. First one, considering the contribution of the acquisitions during the period, it would appear that organic performance is down significantly on last year. Can you explain?

The organic performance is down in any event, if you look at sort of -- if you look at EBITDA and revenues in sort of in the Logicalis business. In Westcon, there were no acquisitions in Westcon [indiscernible]. So you really need to look at the businesses individually. So I don't -- to be honest, I don't really follow the question.

There are hardly any acquisitions last year. There was one, Analysys Mason.

Analysys Mason and a small one -- and a small in Logicalis.

There's nothing in Westcon. So Westcon's growth, both pre and post-restructuring, EBITDA growth is all organic. And then in Logicalis, I think there were a couple of -- there was a small one in Spain and there was one in Singapore.

Correct. But in Logicalis, the sort of the big decrease in performance is as a result of Latin America. And I think we've unpacked that in quite -- sort of quite a lot of detail. I mean that was driven, to a large extent, by trading conditions in Latin America. And I think Jens mentioned specifically that Brazil was one of the companies that was most impacted by COVID, correct? And there was a currency impact as well.

Yes. Excluding Brazil, there would have been organic growth in Logicalis and the rest of the world Logicalis.

Thank you. The follow-on is, are there any more restructuring costs carrying over into H1 2022?

No. We've made it clear that we spent a lot of time planning -- evaluating and planning and designing the different divisions, how they think they need to be configured coming out of this crisis. We're clearly not completely out of it. But we think we have got a very good handle on what we think how the business should be positioned and structured going forward. And we're not expecting any more exceptional or fundamental restructuring in the year ahead.

Follow-on questions from Richard Williamson from Edison. What will drive the growth of Analysys Mason to say over $100 million over 3 years and a critical acquisition to this growth? And more generally, what level of acquisitions should we anticipate in FY '22?

Well, if you look -- I don't think what we've got our eyes on or what you're going to expect from us is going to be much different in terms of M&A behavior to what you've seen from us in the last 5 years. Smaller-to-midsized acquisitions and add-ons where we think acquired businesses can either augment or extend the positioning of the existing businesses. I think we have said this many times before, we tend to do acquisitions to extend our skill sets and knowledge, that's our principal reason. Sometimes, we will look at doing transactions for consolidation benefits or for extending territory or scale. But that's -- they're generally not premeditated. The ones that the transactions that we look at doing in terms of our strategic road map are all around to address skills gaps and time to market with new technologies and the like. So in Analysys Mason, we have -- there are a few geos where we think we could be much better supported, where we wouldn't have to change the fundamentals of what we do, but we'd get much greater customer access or customer amplification and that might be in North America, where we're a relatively small player. We are very strong now across most, but not all markets in Europe. And furthermore, we could most probably be of more scale in Asia. So there the -- that's at the geo level. At a technology level, which applies really more to technology and service is really more to Logicalis. We've got -- we increasingly got our eye on 5G and what the impact -- what that's going to mean in terms of impact to our business and our industry. So that's something that we've got is high on our watch list or do list rather. So yes, these things are there, skills -- as I said, mainly skills augmentation.

Fred, sorry, just coming back to Muneer's previous question, I would just like to point out that only $16 million, 1-6, of our revenues of $4.1 billion were from acquisitions, which is, I don't know, 0.3%. So it was really, really small.

Thank you for that. Next question is from Ielhaam Ismail from Prudential, asking what is the annualized cost saving that will result from the restructuring and -- or alternatively, what is the payback period for the costs incurred?

Some of that, will hand over to Ivan. Some of that restructuring, of course, didn't happen during the course of the year. Some of it, 1/3 of it had happened in the first half, 2/3 in second half. So you can't take the closing position and our total cost for the year and then annualize it because some of those are really in the year. But you would expect that half to -- yes, something north of 1/2 to 2/3 of that should over time show up in the real reduction in OpEx. Ivan?

That's correct, Jens. And there's also sort of categories of costs because some of those costs go to OpEx, and some of those costs, you'll see in sort of in OpEx savings and some of those costs savings were -- essentially went against cost of sales, where it was, for example, professional services people, et cetera. So it's a combination of OpEx savings and ultimately, savings or improvements in gross profit.

Next question from Franca Di Silvestro again from Titanium Capital, asking if you can -- if they can expect central costs to reduce further in light of the Westcon Central costs remaining high.

They're not -- well, there might be scope for a little bit, but I think I referred to it in the Westcon part of the preso, we're into a territory now that we're -- we're not going to get our central cost down by anything measurable. They are 1% of our gross revenues, in fact, slightly less. And we have competitors where the central costs, which are mainly IT by the way are much lower than that. They could be 0.75% or 0.5%. But we think that the long way out of this is scale, and that we don't -- we've demonstrated now that we can move the meter in the field or in the regions and grow the business. It doesn't grow our central costs. So that's a fixed component now to our total SG&A. So the thing that we're focused on, we're not saying that it's not important to reduce cost, of course, it is. But we think that it's going to -- at the end of the day, we have to also keep pace in terms of what we're doing and what we're investing in on the back end of the business. So -- but we do think we're in a much better position now to address that cost base as a percentage of our overall sales by growing the rest of the business.

Agreed, Jen. If I could perhaps also just add sort of, so this sub-30 figure has shrunk from north of 60 just a couple of years ago at the time that we did the disposal of Westcon Americas, these central costs were around $63 million, and they are now under $30 million and 60%, 70% of that relates to IT related costs for the Westcon centralized systems and platforms.

Next question comes from [indiscernible] Baldwin from Woodside Partners asking what percent of your debt is vendor financing? And is your business being impacted by Cisco shortages?

Okay. So vendor financing and extended payment terms that we get from our vendors is not disclosed or doesn't form part of the net cash or sort of the net debt, where we get extended payment terms, that's part of accounts payable. But that said, we do use -- particularly in Latin America, we do use Cisco Finance to sort of to provide debt funding to the business in terms of sort of short-term or current debt. But the sort of the bulk of the debt in the group is bank-related and not vendor funded.

Thank you. Next question comes from Peter Takaendesa from Mergence Partners. The first one is with the dilution of Synnex in Westcon International, is Synnex happy to sit passively, or -- yes, is Synnex happy to sit there passively?

Sit there and work passively.

Remain a passive minority shareholder.

Okay. Yes, of course. Of course, they're very happy to do. In fact, they're actually -- we did a recapitalization last year, and they've gone from 10% just under 8%, but yes, they remain a passive investor. We have a commercial venture with them around certain global customers covering certain large vendors and certain technologies, and that's going very well, and we're in step with those sort of, let's call it, commercial opportunities. But at a business level, they're not present at all in our markets, and we're not present in their markets.

Thank you. The follow-on question is around the effective tax rate, which remains high. When do you expect it to normalize? And is there anything that you can do to change the legal structure of some of loss-making businesses contributing to this?

Sure. So Fred, in terms of the -- sort of in terms of the effective tax rate, as we've indicated, it remains disproportionately high as a result of, sort of, mix of profits and non recognition of deferred tax assets. We've also indicated in the -- sort of, in our announcement that we're expecting a much more normalized effective tax rate this year as the profitability, particularly if the Westcon business continues to grow, and we can start recognizing more of those deferred tax assets. It's not as much a structural change as essentially improving the mix of profits. One of the key items that will also improve the effective tax rate is the recent changes to the -- or the proposed change to the U.K. tax rate, which will be increasing shortly because the bulk of the deferred tax assets that we've recognized so far are in the U.K. and particularly in relation to the Westcon business and sort of just the rate change from the current U.K. tax rate to the -- sort of to the new rate should -- in FY '22 result in higher deferred tax assets being recognized. Based on our planning for the year as well, we're expecting a much better mix in our profitability, which should also enhance the rate. So we would expect a much more normalized rate at this stage for FY '22 than -- sort of than for the last few years.

Thank you. And a final question on the list at the moment from Mudiwa Gavaza again from Business Day, asking what is your target gearing ratio in light of the substantial cut in net debt during the period?

Yes. So in terms of -- I think, clearly, the sort of the business can -- sort of can absorb higher debt than what we -- sort of than what we currently carry. We don't sort of -- we don't have a specific sort of gearing ratio targeted. Of course, that is important, obviously, in the context of the various covenants that we've got in terms of our various facilities across the group, and we've clearly got significant headroom from that perspective, given the very strong cash flow performance that we've had in this year. I think what's important to note as well is that our cash and our debt fluctuates quite a lot over the cycle and over the period. So this was -- sort of this is obviously your net debt position at a point in time. Westcon, in particular, is hugely working capital intensive. So your cash and debt sort of ebbs and flows over -- sort of over the cycle as a result of your various working capital movements, but they have certainly in our opinion, capacity to take on more debt in this environment. At the moment, all the debt that we've got is essentially working capital related funding.

Thank you very much. There are no further questions.

This very neatly brings just after 3:00. So I'll thank everyone for participating. And as I said before, we'll next be presenting in the middle of October our interims.