Helios Fairfax Partners Corporation (FFXXF) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Fairfax Africa Holdings Corporation's 2020 Annual and Special meeting. [Operator Instructions] Your host for today's call is Prem Watsa with opening remarks from Keir Hunt. Mr. Hunt, please begin.

Good afternoon. I'm Keir Hunt, General Counsel and Corporate Secretary of Fairfax Africa. Welcome to Fairfax Africa's 2020 Annual and Special Shareholders' Meeting, which will be followed by a presentation by Michael Wilkerson, Fairfax Africa's Chief Executive Officer; and then a Q&A session with Prem Watsa, Fairfax Africa's Chair; Paul Rivett, Fairfax Africa's Vice Chair; and Mr. Wilkerson. Forward-looking statements may be included during these proceedings. Actual results may differ perhaps materially from those contained in such forward-looking statements as a result of a variety of uncertainties and risk factors, the most foreseeable of which are set out under risk factors in Fairfax Africa's annual information form, which has been filed with Canadian securities regulators and is available on SEDAR and which now include the risk of adverse consequences to Fairfax Africa's business, investments and personnel, resulting from or related to the COVID-19 pandemic. Fairfax Africa disclaims any intention or obligation to update or revise any forward-looking statements except as required by applicable securities laws. I'll now ask Prem Watsa to make some introductory remarks and to begin the annual and special meeting.

Thank you, Keir. Good afternoon, ladies and gentlemen, and welcome to Fairfax Africa's Third Annual and Special Shareholders' Meeting. I'm Prem Watsa, Chair of Fairfax Africa. I will act as Chair of this meeting. Due to the coronavirus, meeting will be held on the web, but we look forward to seeing many of you in person next year. The meeting will now come to order. I shall ask Keir Hunt, the General Counsel and Corporate Secretary of Fairfax Africa, to act as Secretary of the Meeting; and Shirley Tom and David Cavasin of Computershare Trust Company of Canada to act as scrutineers. I can report that as a result of reviewing an affidavit of mailing and a preliminary report of the scrutineers, I'm satisfied that notice of this meeting has been duly given, that a quorum is present, and that this meeting is therefore properly called and constituted. I propose to move quickly through the formal business. To that end, I announce that the minutes of the previous annual shareholders' meeting held on April 10, 2019, are available for inspection upon request to Fairfax Africa's Corporate Secretary. As well, I now formally place before the meeting the annual report of corporation for the year ended December 31, 2019, which includes the company's financial statements for the fiscal year ended December 31, 2019, and 2018, and the report of PricewaterhouseCoopers on the 2019 statements. In addition, I declare that the total number of votes attached to shares represented at this meeting by proxy, which have been directed to be voted in favor of the election of directors nominated below and the appointment of the auditors of Fairfax Africa, are in each case not less than 95% of all votes that may be cast on such matters. We will now move directly to the election of directors and invite a nomination for directors.

I'm Keir Hunt, General Counsel and Corporate Secretary of Fairfax Africa. I nominate as directors of the corporation for the ensuing year Hisham Ezz Al-Arab, Lt. Gen. Roméo Dallaire; Christopher Hodgson, Quinn McLean, Ndidi Okonkwo Nwuneli, Richard Okello, Paul Rivett, Michael Wilkerson and Prem Watsa.

Thank you very much, Keir. As no other nominations for directors have been received and as the number of directors nominated is exactly the number to be elected, I instruct the secretary to cast a single ballot for election of the nominees as directors and declare those 9 nominees elected as directors of the company. I now invite a resolution regarding the appointment of auditors.

I am Amy Sherk, Chief Financial Officer of Fairfax Africa. I move that PricewaterhouseCoopers be appointed auditors of the corporation to hold office until the next annual meeting.

I am Jennifer Allen, Vice President of Fairfax Africa. I second the motion.

I declare the motion carried and PricewaterhouseCoopers appointed as auditors. The next item of business is to consider approving by special resolution a specific deviation from Fairfax Africa's investment restrictions. Fairfax Africa currently has an investment in Atlas Mara Limited comprised of common shares, debt instruments and warrants, which is set out in more detail in our 2019 management proxy circular. Fairfax Africa may determine that in order to assist with Atlas Mara in executing its strategic plan, it may wish to make further investments in Atlas Mara such that on the date of the investment, the total amount of our investment in Atlas Mara calculated on a fair value basis would exceed the investment restrictions set forth in Fairfax Africa's bylaws. Therefore, in accordance with Section 11.6 of the bylaws, we are seeking approval of shareholders for such deviation. The full text of the special resolution to be voted on is in Schedule A of our 2019 Management Proxy Circular. I propose to dispense with the full reading of the resolution, and that for the purpose of this meeting, the text will be taken as having been read in full at this meeting. To be effective, this special resolution must be approved by at least 66.67% of the votes by shareholders of the multiple voting shares and the subordinate voting shares present in person or represented by proxy, each voting separately as a class.

I am Keir Hunt, General Counsel and Corporate Secretary of Fairfax Africa. I move that the special resolution in the form attached as Schedule A to our 2019 Management Proxy Circular regarding the proposal to deviate from Fairfax Africa's investment restrictions be approved.

I am Amy Sherk, Chief Financial Officer of Fairfax Africa, and I second the motion.

Thank you, Keir. Thank you, Amy. I note that the proxies submitted prior to today's meeting by the holders of subordinate voting shares and multiple voting shares, each voting separately as a class, have been tallied and recorded by the preliminary report of the scrutineers. I declare the motion carried and the special resolution set out in Schedule A to our 2019 Management Proxy Circular approved by at least 66.67% of the votes cast by holders of the multiple voting shares and the subordinate voting shares, each voting separately as a class. I propose now to terminate this meeting. After that, I'd like Michael Wilkerson to discuss operations and then our moderator will present your questions. I now invite a motion for termination.

I'm Keir Hunt, General Counsel and Corporate Secretary of Fairfax Africa. I move that this meeting be terminated.

I am Amy Sherk, Chief Financial Officer of Fairfax Africa, and I second the motion.

I declare the meeting terminated. Thank you all for this formal aspect of our Fairfax Africa meeting. And now, ladies and gentlemen, we'll go to Mike Wilkerson, who's our President, who will review the operations of Fairfax Africa. After that, Mike will pass it back to me, and we will go into the question-and-answer period. So Mike, over to you.

Thank you, Prem, and good afternoon, everyone. So as mentioned, I'm Mike Wilkerson, CEO of Fairfax Africa. Let me jump right in with a few opening comments, and then we'll move on to the Q&A. So as you will have read, we ended 2019 with book value per share of $8.72, down 9.2% from the previous year, which represented a 4.7% CAGR from the IPO in February of '17. We reported a net loss of $61.2 million or $1.01 per share, primarily derived from unrealized losses in our public company investments in Atlas Mara and CIG of 41 million and 29.4 million, respectively. We were able to generate a total of $19.4 million in interest, dividends and capital distributions for our investee companies during the year. And I will comment that since our IPO in 2017, we have made a total of 6 substantial investments and have deployed about 72% of net proceeds from our IPO and follow-on offering. These investments are spread across financial services, food, agriculture, education and infrastructure. We made one new platform investment in 2019, 2 top-up investments into existing investee companies. The platform investment was CIG of 47 -- excuse me, $49.7 million as an investment into energy infrastructure. The situation we walked into with CIG in January 2019 was much more difficult than we had expected. The financial restructuring and operational turnaround of that business each required more time and revealed deeper issues in the construction subsidiary and the industry generally than we had anticipated, which when combined with a very anemic economic environment in South Africa and slower-than-anticipated reforms in infrastructure and energy policy, further delayed recovery of that business. On a positive note, we reached agreement on restructuring financial debt, which positioned the business to better navigate through a difficult environment. We embarked on a change in strategic direction at Atlas Mara with new leadership in the first quarter of 2019 and announced a strategic transaction in the second quarter. The consummation of that transaction dragged on into the new year, which similarly delayed the expectations we had set in the first half of '19. We have, nonetheless, shifted to focus on a leaner, more effective structure, and UBN is the cornerstone of our efforts there. These each took a lot of work, but we did make good progress on various strategic initiatives at each of them and at AFGRI, each of which I'll come on to you shortly. As we're all very well aware, as we moved through the first quarter, we were faced with a new challenge caused by the COVID-19 pandemic and government interventions to address it, which has stalled economic activity across the world. The initial impact on African financial markets was worse than elsewhere. African currencies, sovereign debt and public equities each saw a dramatic deterioration over the first quarter in both absolute and relative terms when compared with both developed and other emerging markets. I'll come back to this towards the end of today's call, but first let me turn to a more detailed review of our investment positions in 2019. I'll start with AFGRI or AGH, which was Fairfax Africa's first investment from our IPO. AFGRI is a holding company of agriculture, food and financial services assets with deep expertise in the grain value chain. AFGRI had a strong 2019 despite continued widespread drought in Southern Africa, with improved financial and operating performance. The agricultural division, which includes grain management and John Deere equipment, performed well with strong profitability in the grain management business and stable performance elsewhere. Financial services achieved a record farmer lending book of ZAR 14 billion, which is approximately USD 1 billion, and maintained good margin and contribution to AFGRI's profit and cash flow through its fee-based model. A key initiative achieved during the year was a creation of a strategic commodity platform called AFGRI Silo Co, in which AFGRI contributed its physical silo infrastructure to a platform with a consortium of leading institutional investors in South Africa. Silo Co will act as a consolidator of other agricultural and similar infrastructure assets, enabling further investment on a platform that is expected to benefit from economies of scale and other cost synergies. AFGRI will receive an ongoing income stream through a management services agreement that provides AFGRI with rights in perpetuity to manage and operate the business for an annual fee. AFGRI will also maintain a minority equity stake. The transaction enabled significant reduction in secured debt at AFGRI as well as a distribution of approximately $10 million to Fairfax Africa. Now moving to our investment in Philafrica Foods, a leading food processing company in food categories in Africa. As a reminder, Philafrica was spun out of AFGRI's business -- legacy food processing businesses to serve as a platform of development and acquisition of additional food processing businesses in attractive categories and markets on the continent. Philafrica's main businesses include the largest independent feed producer in South Africa; milling of yellow maize and wheat; soybean crushing and oil extraction business, serving customers like Yum! Brands and others in quick-service restaurants and food service industries; Pakworks, which is a snack manufacturer, producing snacks exclusively for PepsiCo as their largest co-packer in sub-Saharan Africa; New Horizons, an integrated poultry producer in Mozambique; Sunshine Bakery, a bakery group in South Africa; and DADTCO, a cassava processor in Côte d'Ivoire and Mozambique. The legacy AFGRI food businesses performed well and in line with expectations in 2019. However, the greenfield portfolio underperformed expectations. As a result, Philafrica determined to exit one of these greenfield businesses and to put in new management teams in the other 2 to address the specific challenges faced by early-stage businesses. Moving on to Atlas Mara. Our investment in the sub-Saharan financial services group, which holds a 50% position in Union Bank of Nigeria, I'll refer to it as UBN, along with investments in banks in 6 other countries. Nigeria is a key market for Atlas Mara as Africa's largest economy and the largest financial services market in Africa outside of South Africa. UBN itself, a leading Nigerian bank, rich 100-year history, strong brand awareness, another good year in 2019 as it continued its positive trajectory. UBN has about 5 billion in assets, 6 million customers, including 2.1 million that are mobile banking customers. Their results continue to show positive trends across several core metrics, including a 25% year-over-year growth in noninterest income and a reduction in nonperforming loans from 8.7% to 5.8%. Over the past 5 years, which represents new management and new ownership, including Atlas Mara, UBN has seen 34% growth in its customers, including 114% growth in mobile customers and 135% growth in online customers as well as 43% growth in active debit cards and growth in deposits and loans of 12% and 11%, respectively. UBN recently received, after the end of the year, regulatory approval to pay a dividend to its shareholders of approximately $20 million, of which half will be paid to Atlas Mara in 2020. We expect the dividend will come in May. It's already received regulatory approval only now, subject to shareholder approval, which I can assure will not be withheld by us or other shareholders. It's important to note that this is the first dividend to be declared by UBN in over 10 years since the financial crisis and central bank intervention of 2019 -- excuse me, 2009, which demonstrates a substantial progress made over this time. We're looking forward to more dividend flow here in the future. BancABC, Botswana, also declared its first dividend under Atlas Mara ownership, which the company expects to pay out -- excuse me, the bank expects to pay out to Atlas Mara later this year. In February of 2019, I assumed the Chairmanship of the Board of Atlas Mara, and with a reconstituted Board of Directors, undertook a review of strategic options to drive shareholder value. This led to a decision to exit Atlas Mara's banking interest in 4 countries: Mozambique, Rwanda, Tanzania and Zambia. This made a lot of sense for Atlas Mara, as these 4 countries in aggregate represented less than 2% of total segment profits before central costs and a return of equity of only 2%, yet had substantial carrying costs in terms of both capital and liquidity support as well as requiring a disproportionate amount of management's time and attention. As part of this decision, we announced a binding term sheet with Equity Group, one of Africa's leading financial service providers, but were unable to complete the transaction by year-end. We are still engaged with Equity Group and continue to expect these divestitures. But as a practical matter, we have been delayed further as a result of COVID-19, travel bans, lockdowns, et cetera. As a result of the delay, we sought and received today shareholder approval to go beyond our normal concentration limit of 25% to help ensure that we can provide ongoing support as needed and if needed to Atlas Mara while it continues to pursue a transaction and consider other strategic alternatives. I mentioned CIG at the beginning of the call and, as a reminder, CIG is a pan-African infrastructure focus group founded in 2007. As we did with Atlas Mara, we reconstituted CIG's Board when we invested in January, with Fairfax Africa nominating 4 directors, including the Chairman and other key positions. We appointed a new group CFO in April, bringing substantial expertise in the construction sector and experience in navigating through turnaround situations. As I mentioned earlier, we successfully reached an agreement with CIG's lenders on the restructuring of the company's financial debt, which was a key strategic milestone. CIG has a diversified portfolio of operations, including services, materials and power and electrical, oil and gas, building materials and railways. CIG's footprint spans over 20 countries as Africa's leading supplier of high-voltage turnkey solutions for substations and renewable energy plants such as wind and solar. CIG also owns the region's leading provider of smart meters for prepaid electrical provision. Building materials provides aggregates for the construction industry, ready-mix and brick for housing materials. Angola Environmental Services provides fully integrated waste management services to the offshore oil and gas industry in Angola. The rail business is a leading railway electrification company in South Africa. The group had a disappointing results in 2019, primarily related to poor performance in the first half of the year. Results were also impacted by a tough macroeconomic environment in South Africa, which placed pressure on most of the group's operations, especially in the construction business as well as impairments resulting from unrecoverable work in progress and receivables. These impairments were backward-looking. They were accounting adjustments that will not impact future cash flows or results. CIG entered Nigeria with prepaid meters, and we think that Nigeria has the potential to be CIG's largest meter market going forward. Finally, Nova Pioneer. You will know this as a pan-African independent school network, one of our early investments, offering preschool through secondary education from -- for students ages 3 through 19. It launched its first campus in 2015 in South Africa, now operating 13 schools with combined enrollment of approximately 4,500 students, of which approximately 2,100 in Kenya across 6 campuses and 2,400 in South Africa across 7. We're very pleased to note that Nova Pioneer had its first graduating class, both in Kenya and South Africa. And in addition, the company opened 3 new schools during the year and continued its strong trajectory of 74% revenue growth group-wide. Schools from the 2015 and 2016 vintages were cash flow positive in 2019, and all schools are expected to achieve cash flow positive positions at maturity. So all of that was some of backward-looking, and I'd like to share some perspective now on the environment, implications of the evolving pandemic on the African continent. So what do we know so far? Like most economies in the world, the abrupt halt in economic activity is causing turmoil across Africa. Governments have moved fairly aggressively with travel restrictions, lockdowns and central Bank interventions and initiatives, along with appeals to the international community for coordinated support. Lockdowns in large African cities are not the same as in China, Europe or North America, as housing settlements are informal; population densities are higher; food and other essentials must be bought and consumed daily, often from open-air markets, kiosks, et cetera, with cash earned that same day. Social distancing has all been impossible when 5 or more household members are sleeping in a single, poorly ventilated room. And washing hands is a good advice, but difficult to follow when water has to be fetched from an unprotected community source down the road. We know that existing health care systems in Africa have limited capacity. And unlike most large economies in the developed world, African government's ability to respond with large-scale fiscal stimulus is very limited due to inadequate tax revenue generation and weak budget positions. However, Africa does have some factors in its favor. African nations have had their share of locally grown epidemics and viruses, most notoriously Ebola, and like Southeast Asia's experience with SARS in the 2000s, have learned from these trials. Fever and health checks at airport and other entry points is a standard practice in many countries for years now. Warm climates, mostly young and mostly rural population spending the majority of time outdoors and persistently little interregional travel are all positive factors across the continent. While 52 of 54 countries in Africa have recorded cases to date, so far, they are not widespread and morbidity remains low. While the full impact of COVID-19 was felt later in Africa than much of the rest of the world, the financial markets have already exacted their toll. Even before the virus had made much headway in the continent, African currencies, sovereign debt and public equities had fallen dramatically, and in many cases, experiencing losses far greater than developed or other -- developed and emerging markets. There has been a dramatic spike in African sovereign bond yields in absolute and relative terms due to capital flight to safe havens internationally, making it costly for African countries and their corporates to raise capital. As an example, South Africa, reflecting its recent ratings downgrade and the COVID pandemic hitting at the same time, saw 190 basis point increase in the first quarter in its 10-year government bond yields compared with 42% -- 42 basis point decline in India and 125 basis point decline in bond yields in the U.S. or similar tenors. With regard to currencies, they all fell significantly against the U.S. dollar in the first quarter. For example, South African rand fell by 28%, Nigerian naira fell by 8%, which will impact on our results, especially in the case of the rand. If you looked across the equity markets, we saw significant deterioration in the first quarter, Atlas Mara down 46%, CIG down 60%, Fairfax Africa itself down 49% and the MSCI Emerging and Frontier Markets Index down 40% compared with being down 20.8% at the worst of the global financial crisis in the fourth quarter of 2008. Compare that with the S&P 500 or NASDAQ, which were down roughly the same amount and in fact less in the pandemic period than in the global financial crisis, and you can see that Africa has been hit pretty hard as a result. We felt it directly, as mentioned, in our own equities. We do have a sense of what the directional impact is likely to be for our portfolio of investee companies. Like most businesses, our investee companies will be tested this year and will likely need to pivot from some of the goals and priorities our management team set at the beginning of the year to meet more pressing matters. At Atlas Mara, banking has been deemed an essential service in Nigeria and all other markets. However, FX devaluation, combined with a drop in oil prices, is likely to affect the macro environment. We're likely to see margin compression in spread-related business lines and temporary caps on transaction fees in a number of markets. The depressed equity markets may also make it more difficult for the company to close out on the strategic initiatives, which we discussed earlier. However, we will continue to drive these to completion, and I can confirm that conversations are ongoing. On a positive side -- positive note, we're seeing some clever product innovation and growth in the digital channel that should be more profitable than the equivalent transaction in brick-and-mortar branch banking. It's early days, and we're looking to see some favorable results there. For AFGRI, although agricultural production has been deemed an essential service, we expect to face volume and margin pressure in the equipment and retail segments as unemployment and recession sets in and purchasing shifts to essential goods. Additionally, South Africa's recent ratings downgrade and the rapid decline in the rand will negatively impact cost of funding for the financial services business and procurement of import products, respectively. Agricultural conditions, however, do remain good and the business appears headed to a robust maize crop in this current harvest. For Philafrica, food production has also been deemed an essential service. Management expects to see some negative implications on certain business units. Sunshine Bakery will likely be impacted as price increases will be challenging and volume might be impacted as consumer income drops. However, to date, we're actually seeing an increase in volume in certain channels, as Sunshine's direct to point of distribution model allows access to kiosks and other points of sale in the less formal channels in the townships. Pakworks' sales are linked to discretionary consumer spending and will likely be negatively impacted as consumer focus shifts to essentials. However, PepsiCo has shifted a good portion of its production to us during this time, which should be a net positive. On another positive note, with the shutdown in Chinese exports and oil prices at cyclical lows, management expects to see a positive soybean crush margin through the remainder of the year, creating some unexpected earnings upside potential. Animal feeds should be stable. At CIG, we foresee a mixed bag across the group but negative impact overall. At a macro level, we expect to see continued significant headwinds in South Africa, as the renewable energy program has inexplicably not been deemed an essential service, notwithstanding the country's ongoing energy crisis and rolling blackouts, which one could argue is a greater long-term threat to SA than is COVID-19. Although maintenance of existing plants does remain an essential service, it is a small contributor to CIG's profits. As a nonessential business, Conco, the main contractor to win the electrical engineering work, is having to pull employees off site. These delays to projects will mean modifications to the timing of expected cash flows, and the business is reengaging with the banks and insurance companies that provide performance bonds, advanced payment guarantees and similar credit support to infrastructure on the implications of the revised timelines. The smart metering business has some essential and some nonessential elements. On the whole, the business will be impacted as the global supply chain disruptions will cause assembly line delay for the remainder of the year. For AOS, the Angolan Oilfield Services business, it will be negatively impacted by the drop in oil prices as revenue and profits are directly correlated to the number of oil rigs in Angola. While the oil industry is essential in Angola and operations continue, customer demand is already coming down. And with the South Africa economy previously in recession and a weak construction sector, the lockdown will further dampen demand in building materials, which is deemed nonessential in the lockdown. For Nova Pioneer and consistent with global practices, all schools in South Africa and Kenya are closed. Nova Pioneer is conducting courses online, but the timing of reopening will have an impact on Nova Pioneer and its tuition-paying families. Even when schools come back online, it's fair to assume a portion of parents will be unable to pay fees due to job losses or income reduction and, therefore, management is assuming a spike in attrition, leading to lower enrollment and revenues this year and potentially into the first quarter of 2021. For Fairfax Africa, overall, that leads us to what we can speak to in the first quarter from publicly available information, we expect that Atlas Mara's and CIG's share price decline in the first quarter will reduce our own book value per share by $0.62 and $0.13, respectively, while the rand's devaluation is expected to reduce book value per share by approximately $0.80 in the first quarter. Our Level 3 investments will also see negative impacts, not from specific business issues but from changes in risk-free rates and equity risk premia as a result of credit downgrades and other factors. In total, we would expect book value per share at March 31 to be down approximately 20% to 25% from year-end 2019. We plan to announce our first quarter earnings on April 30, and we'll have more detail at that time. Even with these adjustments, most of which are visible to the market, I note that Fairfax Africa shares are trading at a remarkable discount to book value. Let me wrap it up here. It is a very difficult environment. We're working hard and, hopefully, smartly, to navigate. Our top priority is the health and safety of our employees, our customers, along with their families and communities. We're tracking closely with the steps taken by governments and central banks. And our management teams have taken quick and decisive action to respond with numerous changes to business operations, policies, procedures, including implementing existing work-from-home contingency plans where possible. We are prioritizing liquidity management and cash preservation throughout the group as our top priority to protect our investments. We're engaged with governments, with regulators, with lenders, with other stakeholders across the group to find solutions to navigate these challenging and terminal waters. Emerging markets are out of favor. Small caps are out of favor. Africa is out of favor. And Fairfax Africa is out of favor. And yet, I'm a buyer. We are seeing opportunities everywhere. We're looking carefully at what might make sense for Fairfax Africa in this environment. We ended the year with about $150 million of investable cash, and we have a credit line for potential access up to $80 million more beyond that if the circumstances warrant. We do expect that we will deploy capital opportunistically in the second quarter of 2020. Despite these very large, very real challenges, the long-term investment thesis for Africa remains intact: strong underlying growth, attractive demographic trends, including rapid urbanization, most rapidly urbanized in the world, improved governance, stability, transparency, large supply/demand imbalances combined with scarcity of capital, which will only worsen in this environment that provides enormous opportunity for Fairfax Africa for long-term investors over the long run. Africa's population is growing at 2.5% a year, about twice the pace of India, and is expected to almost double in the next 30 years. The implication of this is, by the end of the century, Africa will surpass all of Asia in the number of working-age adults. The demographic dividend is a great opportunity for Nova Pioneer, for our other businesses, as they provide basic needs of education, food, energy, financial services, food and energy security to an emerging generation of Africans hungry to prosper and succeed in life. With that, I expect we should move on to questions from our shareholders. Prem, please, may I turn this back over to you? Prem, I hand this back over to you, please, for Q&A.

Sorry, I was on mute. So thank you for that, Mike. We have Paul Rivett with us, Vice Chairman, and Mike Wilkerson, President and CEO. We are ready for your questions. We are very grateful to Jeff Stacey, who will be the moderator of this Q&A session. Please send any questions that you have to him even during this call. So Jeff, let's begin.

Thank you, Prem. And welcome to everyone who is participating in today's annual meeting webcast. [Operator Instructions] By way of background, I've reviewed all the questions and have tried to group many of the questions around common themes and topics to avoid duplication. So let's get started. First question. How have travel restrictions impacted management's ability to oversee the Fairfax Africa investment portfolio as well as limit your ability to investigate new potential opportunities?

That's a good question, Jeff. And I'll pass it on to Mike. Mike?

Thanks, Jeff. Thanks, Prem. Yes. So I would say a couple of things. Obviously, we are not traveling in this environment. We do have team members who are based in Johannesburg. They, too, are in lockdown and actually not leaving their homes. So the travel ban is complete. So on one hand, it is affecting us in the sense that it has slowed down the pace of our ability to look at pipeline opportunities that require site visits and interactions with management. However, I would say that our engagement and our interactions with our existing portfolio of companies, which, frankly, is our top priority to preserve and protect value there, that has not been impacted as much as one might have thought. We are in daily communication by phone, by video conference or otherwise with our leaders, with our CEOs, with our management teams. And I would say that it's working very, very smoothly in spite of the fact of not being able to be in the same room together.

Thank you, Mike.

So going back to the time of the IPO in early 2017, your industry consultant, Pactorum, had identified 5 key sectors it considered attractive for investment, namely, energy, infrastructure and logistics, food and agriculture, consumer products and retail, and financial services. Pactorum also identified 8 priority countries: South Africa, Nigeria, Ethiopia, Kenya, Egypt, Mauritius, Rwanda and Botswana. So the question is this. Has this changed since you went public? And specifically, what countries and sectors are most attractive to you right now?

Paul?

Thank you -- sorry, excuse me. Go ahead.

I was just -- yes, Mike, just I was going to ask Paul Rivett if he had anything to add before I pass it on you, Mike. Paul, anything to add?

No -- I'd just say that, no, I don't think it has changed. I mean we have -- if you look -- go back and look at what we've done, we have addressed each of those areas, and we are primarily in those countries. We continue to look a bit further afield. But as Mike said, right now our primary goal is to focus on the companies that we have and to service them. But Mike, over to you.

Thanks, Paul. I think that's right. So you've heard me speak to the sectors and the priorities that have not changed from the IPO. The country list has really not changed much either as to areas or regions that we are most interested in. I would say, currently, we find East Africa to be most attractive, so Kenya and surrounding areas. We probably have shifted our focus a bit from South Africa, and SADC, the Southern Africa region, was given relatively lower growth opportunities. But in principle, those remain our core areas and countries.

Thank you, Mike.

Third question. Emerging markets in Africa, in particular, have been very hard hit, as you alluded to in your comments, Michael. Do you think markets there have overcorrected? And is there anything that can be done to change things?

Mike?

Okay. Thanks, Prem. Thanks, Jeff. Yes, so I read off some statistics. I do think that markets have overreacted in Africa. It certainly is the case. Again, if I just go back to -- in this period of time, emerging markets as a whole fell about 24% in the first quarter compared to 20% for the S&P, 14% for the NASDAQ. So emerging markets were hit a bit worse. If you look at Africa, the index for Africa was down 39.2%, nearly double the S&P 500 and significantly worse than emerging markets as a whole, which would have picked up China, India and other places. When you look at where equities, public equities in Africa are valued today, similarly, I think it's more attractive than ever. In my view, personal view, the markets are oversold. South Africa is oversold. It is an interesting opportunity for us.

So just to add to that, Jeff, the Fairfax Africa stock has fallen in this first quarter from about $6 a share to about $3 a share. $3 a share, the whole company is worth 60 million shares outstanding. So 60 million times 3, that's $180 million. And as Mike said in his comments, we've got $150 million in cash. So all the businesses that we have are worth $30 million. So I think it's -- of course, a lot of this is all over the world. There's been a coronavirus panic selling, and smaller companies have taken the brunt of it, and Fairfax Africa's very much, as the numbers suggest, at the forefront.

So we had multiple questions about share repurchases. So I've kind of aggregated this into a single question. Will you share your thoughts on share repurchases, given the big gap between book value and market price?

Yes. Mike, why don't you take that and I'll add to it? And Paul, please add to it, too.

Sure. Thank you, Prem. I'll just say, some of these shareholders would have seen in that in the year, in 2019, we bought back about 3.3 million shares, about $27 million, which was actually a benefit accretive to book value by about $7.5 million. During the first quarter, we acquired about 460,000 shares. We spent roughly -- just under $2 million at an average price of just under $4 per share. So we do see value here. This is not, of course, the primary purpose of why Fairfax Africa exists to buy back our own shares, that with the value so depressed, we do recognize it as an opportune time to complete share buybacks as the market price remains so much below our book value.

So the combination of what Mike said, the 3.3 million shares, Jeff, which was in the annual report, and 463,000 shares in the first quarter, that's about 3.8 million, that's approximately 6% of the shares outstanding. So a pretty significant buyback. And when you could see the shares at these prices, now the shares don't trade a lot, and we're allowed to buy, I think, 2,000 shares a day. So it's not something -- we can buy a block a week, but quite often there's no blocks, and I don't think there were many blocks in the first quarter. But we think if it's -- as Mike was saying, if the value is staring you at the face -- in your face when it's trading at $3, we should take advantage of it. And Paul, anything you want to add on that, Paul?

No, no. I think, Prem, you and Mike made most of the points. And I think maybe the one other thing to add is not just buying Fairfax Africa shares but also buying more shares of the companies we already have in the portfolio at fairly steep discounts.

That's exactly right. We've been doing that also, Paul.

We had a number of questions come in about the strategic storage infrastructure platform, what you called Silo Co in your remarks, Mike. So just people are interested in learning more about that platform that you've created. How far along are you in raising outside capital? What does the capital structure for the business look like? Will you move beyond South Africa? If so, what markets and how big do you think this initiative could become?

Mike?

Okay. Thank you, Jeff. Thanks, Prem. I think this is a great question I'm glad investors asked because it's something that we're very excited about. AFGRI Silo Co, we believe, is a great opportunity to create, let me speak to it from the investor perspective first, a YieldCo-like structure, so you'll be familiar with this, in North America, in Canada, in the U.S., a REIT-like structure for industrial assets that provides a steady stream of [ bond by ] cash flows for the investor based on fixed assets, physical infrastructure. What is it today? Today, it consists of only AFGRI's infrastructure. So we moved in about 81 facilities between silos, bunkers and warehouses with about -- in addition to AFGRI retaining a minority equity interest 4 or 5 other large South African institution pension funds, black empowerment funds, others, with the intention, the stated intention that this would be a platform that would enable us to grow through acquisition of other facilities, other development of CapEx or other things when needed. So we do think this is a great opportunity for growth. AFGRI, in addition to bringing to the table the actual assets, brought to the table the management expertise and have the opportunity to continue to manage this, as I mentioned, through an evergreen contract in perpetuity. It will be a nice little fee stream for AFGRI but importantly allowed AFGRI to go to an asset-light business model and get what we thought was a fair value on the physical assets, delever the company, provide an ongoing fee stream in a new asset-light model. But to the point, now as we look at other opportunities, whether they be other co-ops, public or private, other infrastructure asset plays, we will be able to participate in it. The transaction concluded middle of last year. We've not added anything in yet, but I do know that management are looking at other opportunities, and I do expect that we will add other platform -- excuse me, other assets into the platform over time, initially in South Africa but we -- the Silo Co does have the ability to look beyond the borders. I would suggest that it will start in the SADC region, the Southern African region, similar to where AFGRI has had expertise, feet on the ground in nearby markets.

Paul, anything to add? Thank you, Mike. Anything to add, Paul?

No. That was very good by Mike.

Over to you, Jeff.

I have several questions about foreign exchange gains and losses. Foreign exchange gains and losses are having a big impact on your quarterly results each and every quarter. Is there anything you can do to reduce this volatility?

Yes, so let me...

Mike, let me take a quick crack at it, then I'll pass it on to you. But we thought about this, Jeff, when we began, that we do the same in Fairfax India. Very, very difficult to hedge, very expensive to hedge. And so you have to go unhedged. And in a quarter like Mike just said this quarter, you have a significant depreciation in the rand. But our experience is if you take the long term, these -- the fluctuations are minimal compared to the returns, if you're successful, the returns on the underlying assets. And it's all about the long term, though, because you get swamped by currency depreciation in the short term. Mike?

No, Prem, you answered it better than I could. So sorry for jumping in there, but that is exactly what the answer is and should be. I would add one other thing, which is that we are -- if you look at where we're actually invested, we have the majority of our assets -- our investment dollars invested in the U.S. dollar-denominated assets in the first level. And even those that are rand-based actually do underlying have a good amount of dollar or foreign currency exposure, such as AFGRI's investments in Australia for part of their equipment business, and CIG that has quite a bit better dollar-based income streams.

Mike, Paul and myself and Neil and others in our management team, Jeff, were thinking about this before we began, and we just felt that it was very difficult, if not impossible, to hedge. But the key was to make good investments over the long term. And I recognize that in Atlas Mara and CIG, as Mike said, there's unrealized losses, but the important point is it's unrealized. We are focused on making it better. And over time, we expect to do well.

Question about the proposed or previously announced dividend from UBN to Atlas Mara. Do you expect UBN to cancel its previously announced dividend in light of the COVID-19 pandemic and the poor oil price environment? If this dividend is paid, will Atlas Mara also pay a dividend?

Over to you, Mike.

Sure. Thank you. Thanks, Jeff. Thanks, Prem. So the first part of the question is, do we expect that they would not pay the dividend? No, we do not. I believe they will pay the dividend, and it's already received shareholder approval. UBN is very well capitalized, has the liquidity, has the capital. It's been approved by the Central Bank of Nigeria, as I mentioned earlier, subject only to shareholder approval. We're the 50% shareholder. Other shareholders are aligned, and this will get paid out. I don't foresee any delays to it. Second part of the question was, would there be an onward dividend? No, I do not expect there would be. I expect that the proceeds will be used for general working capital and debt pay-down at Atlas Mara.

Thank you, Mike. I'll pass it back to you, Jeff.

Thank you, Prem. Question about CIG. With the benefit of perfect hindsight, are there any lessons to be learned about due diligence or capital allocation generally in light of what happened at CIG?

Maybe, Mike, let's pass it on quickly to Paul and then to you, Mike. Paul, any comments on that?

Yes, Prem. I think like we're always learning. And CIG, in particular, there's a number of things we learned there. I'd say most importantly, the way we came in on structure. I think with the benefit of hindsight, which of course we didn't have, I think with the benefit of hindsight, we might want to have come in a little differently relative to the banks and making sure that we had worked something out with the banks in advance. But that said, that's hindsight. And looking forward, and Mike talked about this, we still are very, very happy, one, with the management team. They have a fantastic team, in particular, CFO there, and we really like the businesses. And as Mike said, they are getting the benefit of -- if there is anything bright side to COVID, they are benefiting a little bit from that. So we do think, as Africa continues to grow infrastructure, we'll be part of that story. And the jewel there, of course, is the metering business that Mike talked about at the beginning of the call. But Mike, over to you.

Thanks, Paul. I can spend quite a bit of time on this question because I think we -- as Paul said, we are learning constantly. A couple of points I would make. One, we're investing in emerging and, in some cases, frontier markets. So to combine that challenge, which is a real challenge, with also a turnaround situation, I think that would be double challenge. And I think going forward, we will try to avoid that sort of complexity. There's an old quote from Warren Buffet that says this isn't like the Olympics. There's no extra reward for jumping over a 10-foot-high wall, so why don't you find a 1-foot-high wall and jump over that one? And I think that was probably good advice that we could have taken here, just given the amount of complexity that was required to sort it out. I would say also that there is another lesson here, which we've talked about in the past, and it's applicable to Atlas Mara and to CIG. I think being -- from a pure shareholder value perspective, the way we account for things, being the largest shareholder in a small cap, thinly traded company, where you have big swings, and when challenges come, seems to have disproportionately negative effects, I think it's a lesson that we made the same decisions roughly the same time for Atlas Mara and CIG. At CIG, we approached them in that way in public companies. And I think we would not do that again, not find ourselves in that situation again.

Thank you, Mike. We pass it back to you, Jeff.

We had a number of questions about Atlas Mara. So I'll just phrase this. Please discuss Atlas Mara in more detail. If you ignore onetime charges, it would appear to be trading at less than 3x earnings and at a 75%-plus discount to tangible book value. Is this correct? If so, what can be done to correct this discount.

Mike?

Okay. Thanks, Prem. So it's very clear that Atlas Mara is trading at a substantial discount to its book value, tangible book value. We expect that even with the impact that we're likely to see in the first quarter with the naira and otherwise, and there will be impacts as a result of the shift in the official rate in terms of how we account for Atlas Mara, it is correct to say it is trading at a very steep discount to book value at a very low multiple, sort of normalized ongoing earnings. I think those are true statements. Sorry, Jeff, I ask, was there another part of the question that I may have missed in my response?

Just if so, what can be done to correct this discount?

Sure. So let me separate it into 2 issues: one is, let's say, operational issues; and the second is the capital markets-related issue. So operational issues, I touched on earlier, that as we did our strategic review last year, we identified that there was way too much time, attention, capital and liquidity being spent on a relatively small portion of the business that wasn't making money and wasn't likely to make money without significantly more investment of time, attention, capital, et cetera. So we made a decision to focus on the core, focus on profitable markets, where we were making money, where they were largely self-sufficient from a capital perspective and [indiscernible] perspective. That included Nigeria. It included Zimbabwe. It included Botswana. Zimbabwe has country challenges, where the bank is very strong and performing very well. Botswana continues to perform. So one, address the operational challenges that we've determined that the best way to do that is actually transactionally to become -- to take those, what I would say, noncore markets for us because of our relatively weak positions, exit those markets or partner with someone that -- where we can part of a larger group that has a stronger position in that region. That's the operational side. The capital markets side, I alluded to just now in my response to CIG, is we're in a situation, we're in a public company structure, we're the largest shareholder, thinly traded, not a lot of additional support elsewhere. And we don't believe that the market prices reflect in either case the underlying intrinsic value. So we are looking at all the possible alternatives to address the capital market situation in parallel to what we're doing to address the operational challenges. We'll, hopefully, have more to say on both of those soon.

I think that's well said, Mike. Pass it on to you again, Jeff.

So questions that just came into the email address. Are there any liquidity issues with any of your portfolio companies? And additionally, what companies are most at risk of acquiring additional equity capital that would dilute existing shareholders?

Mike, do you want to take a crack at that and then pass it on to Paul?

Yes, I would, and I'm going to have to apologize because, Jeff, the first part of your question got cut off, at least for me. So would you mind just repeating it?

Not at all. Are there any liquidity issues at any of the portfolio companies?

Okay. Got it. So we are monitoring liquidity on a daily basis at each of our companies. This was our first and foremost priority. I would say that there are challenges everywhere in a limited sense that every company around the world is experiencing, which is the following. This week, this month, in this environment, who is going to pay us and thus whom should we pay? So for each investee company, we've moved to a daily and weekly liquidity management where we're looking at it. It's become the attention of not just the treasurer, not just the financial manager, but the CFO, the CFO in every company and shareholder representatives on the Board, as the Board through financing these or otherwise takes a much more active view. We are monitoring it. We believe that we're not in a bad position anywhere. But it is something that has our full time and attention, and it is dynamic and changing every day. Fortunately, I will say that in a number of markets, we have seen initiatives by governments, whether it be by central banks as it pertains to, let's say, Atlas Mara or a bank in South Africa, where there are specific initiatives that are being put in place by the central banks to ensure liquidity, to ensure orderly operations of markets, and we are participants and beneficiaries of that and engage with those -- engage with the regulators, engage with the central banks, engage with governments to ensure that we're able to benefit from that as well. In certain instances, and I mentioned this earlier, it may create opportunity for us to deal with some of the issues around -- where we have essential businesses that are part of providing, whether it be food, agriculture or banking services to work closely with governments, even local municipalities to ensure service delivery and with our vendors, with our suppliers and our customers to make sure that the supply chain is not interrupted, that there's adequate working capital through the group. I will say it is taking more time and attention than it would in a normal environment. And as I mentioned, management's priorities have shifted from long-term aspirational goals to this sort of very tactical, roll your sleeves up, look at the receivables, look at the payables and manage it very, very actively.

Well said, Mike. Paul, do you want to add anything?

No, Prem. I think Mike answered it well. I think it -- obviously, as Mike said in his opening remarks, these are tough times. But Mike and the team, all of us are on daily calls, monitoring each of the companies. And as it stands now, we're confident in their capital, and we'll work through it with them as we are. But it is -- it's tough, and we're monitoring it.

No, that's exactly right, Paul. Jeff, if I could just add, the fact is, Fairfax Africa has got, as Mike said, $130 million (sic) [ $150 million ] of cash. Cash is king in this environment. And you'll remember that old Chinese saying, one step -- one side of the coin is crisis, the other side is opportunity. So we've got $130 million (sic) [ $150 million ] of cash, and we are first focusing on the crisis, focusing on this corona crisis, all of the impacts all over the place. But after we do that, we'll, of course, use the cash for opportunity. And that's what we expect to do. And -- but first of all, as Mike and Paul say, make sure that our existing operations are doing well. And we're very much focused on that and making sure that the existing investments that we've had, the 6, continue to do well. Jeff?

So we had a question come in while the meeting was ongoing in response to the discussion about both share buybacks and Michael's comments that he's excited about the possible opportunities to deploy capital. And so the question is, just how do you trade off the capital allocation decision between buybacks and making new investments at the present time?

So I think Michael made the point that our first -- and Paul did, too, our first focus is these 6 investments that we have. We want to make sure that they're doing well. That's how we build value for the shareholder. But when we have these ridiculous prices, if I may use that term, at $3 a share, that the whole company is worth $180 million, we've got $150 million in cash, then we feel if we can buy shares at $3 a share, we paid up to $8 a share. So you can see what we look at the long-term valuations of Fairfax Africa. We paid on average $8 for that 3.3 million shares. And more recently, as Michael said, we paid $3 a share for the most recent purchase. And so -- yes, so we, of course, will look at buying back shares. But our first focus is to make sure that the companies that we invested in are well capitalized and are able to do well.

So we had a question, Prem, from a shareholder. I'm curious to better understand your views on when it is appropriate to exit an existing investment.

Yes. So Jeff, these are all investments, right? So we like to work with good people. We've got good management. Mike deals -- Mike and Neil deal with very good management. Paul helps them. And -- but there comes a time when you would look at potentially exiting it. We know about these things. We know that you have to get the right price. And so Mike and Paul and myself and Quinn and others are always looking at those opportunities, and we'll react when it makes sense for the Fairfax Africa shareholder.

So a related question to that, that I -- several came in, in this regard. How full is the current pipeline for potential investment opportunities?

I think Mike mentioned that again. Our first focus, Jeff, is really to make sure -- I'm repeating myself, but make sure that, that one -- that those 6 investments are doing well, particularly Atlas Mara, particularly CIG. Paul mentioned the point and Mike said too that the share prices are low, and we're buying those shares also. So our first focus is to make sure those investments are doing well. And then we look at other investments. And Mike has -- Mike, in terms of the pipeline, do you want to add anything?

Yes. I would just say, Prem, thank you, that we are -- we do continue to look. I mentioned the prioritization that's been said now several times is our current existing portfolio during, let's call it, crisis moment to make sure that they're well protected. That's our top priority. We feel good about our pipeline. We feel good about the ability to deploy capital with that perspective in mind. We think about -- in this environment or with an ongoing delayed recovery, what would be relatively attractive. You won't see us looking terribly hard at airlines, cruise ships, hotels, discretionary consumer and the like. Other sectors that we think are fairly resilient include things like telecom infrastructure, the food production, agri, energy infrastructure, basic building blocks that are likely to be relatively less impacted in this environment than some of the more discretionary items.

Well said, Mike. Jeff?

So we're down to the last question and just one shareholder queries. Does Fairfax Africa plan to begin paying dividends on a regular basis at any point?

Well, Jeff, that's a good question and that's way off in the future. You shouldn't be buying Fairfax Africa's shares for dividend because we're focused on capital appreciation, just like Fairfax India, over time. But once we develop a stable operation, stable income, then we'd certainly look at it. But I wouldn't consider that for the next few years at least, very much developing Fairfax Africa. And is that the last question from...

Yes, it is.

So Jeff, thank you very much. And we -- as we -- this is our third annual meeting. Our stock price has come down. Two years ago, it was at $14. We raised money at $10. We seemed to be happy. One year after the IPO, it went up to $14. Since that time, it's gone down mainly because of Atlas Mara and CIG. And we apologize to our shareholders that -- who have suffered this depreciation. But rest assured, we are focused on building it back. And -- but Mike and Paul and the excellent management team that I really want to thank here at this AGM for all the good work that they've done. And it's a lot of work in -- that this corona crisis has brought on all of us. I do want to take a moment to thank our directors who have been so supportive and tremendous experience who supported Mike and Paul, myself, right from the time we began. And I'd like to thank all of you for joining us today and for all of your thoughtful questions. And I'd especially like to thank you, Jeff Stacey, as our moderator and for so nicely conducting the question-and-answer session. And now we appreciate you being with us by the webcast and telephone during this unprecedented time. And we, of course, look forward to seeing you all in person a year from now. So from all of us, Paul, Mike, myself, thank you very much for attending, and this call now has concluded. Thank you. And thank you very much, Jeff.