Invicta Holdings Limited (IVT) Earnings Call Transcript & Summary

Good morning, and welcome to the Invicta Holdings Limited Interim Results Webinar and Presentation for the 6 months ended 30th September, 2024. The management team will be taking you through the presentation. [Operator Instructions]. I now hand you over to Steven Joffe.

Welcome to you all, and thank you for joining us for the presentation of our results for the 6 months ended 30 September 2024. I am Steven Joffe, the Chief Executive Officer of Invicta, and I'm joined by our CFO, Nazlee Rajmohamed. Craig Barnard is also available as part of our panel to answer any questions you may have. During this presentation, in respect of any commentary or views we may portray and to the extent we analyze information or make forward-looking statements, please have regards to our disclaimer. Today's presentation will cover our group and segmental results for the interim period ended 30 September 2024. We will also attempt to cover key developments, prospects and strategies. Invicta distributes world-leading capital and earthmoving equipment, industrial, automotive and agricultural parts, often exclusively, which we try and ensure are always available and that are overlaid with a technical and service solution. We thus differentiate ourselves by adding value through our distribution chain, product availability and by providing technical support. Technical support helps prevent disintermediation and is a key part of our strategy to add value to our customers. Our trading results for the period have largely aligned with those of the prior period, reflecting the strong and consistent nature of our core operations. However, it's important to note that our financial results were impacted by the strengthening of the rand against the major currencies, as the strength of the rand during the period has a negative effect on our reported earnings. Despite these currency headwinds, the company's underlying businesses remain resilient with operations continuing to perform in line with expectations. The strength of our operational model and the strategic initiatives have allowed us to maintain stability even in the face of tough external factors. We remain confident in the strength of our businesses and the long-term value we aim to deliver to shareholders. We continue to focus on executing our strategy, driving operational efficiency and positioning ourselves for sustainable growth. We believe that our strategy of investing offshore in our markets will, over the long term, deliver the return we endeavor to obtain for our shareholders. Over the period, we saw persistent high levels of inflation. Subsequently, with the slight easing of interest rates, we hope that the inflation will continue to normalize and create an environment favorable for trade. Many central banks have begun cutting the interest rates to stimulate activity. We welcome the South African Reserve Bank's decision to cut rates locally, and we hope that the cuts will continue this year as the rates remain high. Unfortunately, the war in Ukraine and the conflict in the Middle East continue to be waged. These conflicts as well as other geopolitical and economic factors will perpetuate the volatility in energy prices, currencies and future economic outlooks. In South Africa, load shedding has abated, and we have traded through the entire first half of the year without electricity disruptions. Throughout the period, we experienced volatility in currencies and supply chain challenges, including shipping and logistics as well as delays at the ports. In the lead up to the South African elections and for a period thereafter until the establishment of the GNU, we experienced a reservation in placing orders across the board from our customers. In certain sectors, this has created a glut in the market, which has resulted in pricing pressure as many suppliers remained overstocked. Notable achievement for the period, notwithstanding the challenging environment include growing sustainable operating profit by 7% to ZAR 354 million and a 3% increase in cash generated from operations to ZAR 332 million. On the 8th of July, we redeemed all of the 6.9 million outstanding preference shares for a total of ZAR 703 million. Through this rationalization of our capital structure, we've unlocked additional value for ordinary shareholders. As this redemption took place midway through the period, we will see the full benefit coming through in the years ahead. During the period, we restructured the KMP operations into the Kian Ann joint venture, and we completed the acquisition of the U.K.-based NWB. I will speak more about this later in the presentation. In addition to this, we sold 2 properties, which were noncore to the operation. Notably, after the period under review, we are making good progress in setting our Kian Ann warehouse in Singapore. We've obtained most of the regulatory approvals as required, and we anticipate closing this transaction in January 2025. Group financial overview. We report on our businesses as 4 segments. And while Kian Ann forms part of segment 1, we will report separately on the Kian Ann business due to its relative size and contribution. Our segments are RPE, Kian Ann, RPI, RPA and CE. Sustainable operating profit was 7% higher than the previous period, amounting to ZAR 354 million. In determining sustainable operating profits, we have made the following adjustments. We reversed profits made on the disposal of investments in both the prior and current period and added back the amortization of the purchase price allocation assets on the NWB investment of ZAR 2.8 million. In the prior period, we also added back a loss on the early termination of an interest rate swap. The Kian Ann contribution increased by 5%. In determining our share of sustainable net contribution from Kian Ann, in the prior period, we deducted the profit made on the disposal of the Shanghai property amounting to ZAR 33 million, and we added back the amortization of the purchase price allocation assets amounting to ZAR 7 million in both the current and the prior period. Please note that the ZAR 85 million includes the contribution from KMP in the current period as the KMP operation now forms part of the Kian Ann Group. Sustainable headline earnings decreased by 15%. In determining our sustainable headline earnings, we added back the amortization of the purchase price allocation assets amounting to ZAR 9 million. And in the prior period, we added back ZAR 8.3 million. Please have a look at our key indicators. Where appropriate, they've been adjusted for once-off items to try and present a position showing sustainable earnings. Operating profit was 7% higher than the prior period. Headline earnings per share were 14% lower than the prior period. Our net asset value per share of ZAR 52.03 was 1% lower than at 31 March 2024. No adjustment has been made to the net asset value calculation. The net asset value was impacted by having to mark our foreign investments to the spot rate at the end of the period. The ForEx translation, coupled with the dividends paid over the period exceeded earnings, resulting in a 1% NAV reduction. I'll now hand over to Nazlee.

Thank you, Steven. Revenue for the period was in line with last year at 2% up. The gross profit percentage was maintained at 32%. This was a major focus, and the team worked hard on keeping our margin intact. We remained focused on overheads during the period and management was able to save costs, thereby decreasing expenses by 2% compared to the prior comparative period. Operating profit before foreign exchange movements for the period was 11% higher than the comparative period. This highlights the resilient nature of our operations under the tough trading conditions. And we thank our management teams for their ingenuity and focus in maintaining stable levels within the business. We have experienced massive currency volatility throughout our group over the period. The rand strengthened nearly 9.2% against the U.S. dollar from ZAR 18.96 on the 31st of March to ZAR 17.22 on the 30th of September. The impact on our group for this period was a net ForEx loss of ZAR 18 million, which is a ZAR 51 million swing compared to the same 6 months from last year. As a matter of policy in South Africa, we hedge all confirmed foreign purchase orders. Net finance costs increased by only ZAR 9 million despite the fact that net debt was higher following the repurchase of our preference shares. During the period, the South African Reserve Bank decreased the prime interest rate by 25 basis points to 11.5%. We welcome this adjustment from the SARB, and we hope to see continued cuts in the remainder of the year. As mentioned by Steven, please note the ZAR 145 million foreign exchange loss on foreign operations. This is the impact of having to mark our foreign operations to the spot rate at the end of each period and reflects the appreciation of the rand over the interim period. With our strategy for offshore expansion, we have made our business more reliant on that of the major foreign currencies, and we see the impact of this through the ForEx adjustment for the period. We believe that our strategy is correct and that it will yield benefit over the long term. Considering the savings realized on the dividends to preference shareholders and the increased finance costs, ordinary shareholders are ZAR 20 million better off. The redemption took place at the beginning of July and the full benefit will only be seen in the next financial year. Steven will speak more about the outlook of the capital structure of the group later in the presentation. Property, plant and equipment decreased by ZAR 58 million. This is primarily driven by the disposal of the KMP operations to the Kian Ann joint venture. Investment in joint ventures is our 48.8% investment in Kian Ann. The decrease from the prior reporting period is made up of ZAR 79 million of equity accounted earnings, less ZAR 82 million of foreign currency translation and the dividend declared of ZAR 43 million. Goodwill decreased by ZAR 12 million. This is due to the derecognition of the goodwill on the KMP business through the disposal previously mentioned as well as a foreign exchange adjustment from the strengthening of the rand. Finance lease receivables, including the current portion, increased from ZAR 214 million to ZAR 247 million. This is finance extended to customers across our CE business. Much of this finance is short term in nature, being a period of less than 12 months. We remain focused on working capital management. Inventories net of provisions decreased by ZAR 159 million. This decrease is driven by the strengthening of the rand and the derecognition of the KMP inventories as part of the disposal. The net reduction in the RPE segment inventory balances were due to the KMP transaction and the addition of the NWB acquisition. In RPI, inventories decreased by ZAR 26 million. This is due to the impact of the rand appreciation. Our management teams continue to focus on the number of months of inventory held. We are still experiencing massive volatility in currencies, logistic costs and inflationary pressures in our basket of products. Our continued focus on ordering the correct inventory and selling aged inventory has helped to keep this number in check. Trade and other receivables increased by ZAR 50 million. We continue to see across our businesses that the debtor insurance levels and criteria continue to tighten. We continue to focus on giving appropriate credit and ensuring the collectability of our receivables. Please note our cash on hand of ZAR 734 million. We are pleased to announce that during the period, we redeemed all the group's outstanding 6.9 million preference shares. This is a significant milestone for the group as we look to improve returns for our shareholders. Over this interim period, the redemption of the preference shares has resulted in a net gain for ordinary shareholders of ZAR 5 million and will result in even more on an annualized basis into perpetuity. Our borrowings and finance lease liabilities amounted to ZAR 1.7 billion, of which ZAR 1.3 billion is noncurrent and ZAR 422 million is current. With our cash on hand of ZAR 734 million and our overdraft of ZAR 20 million, we have a net cash on hand of ZAR 714 million. Our net interest-bearing debt is thus ZAR 1.02 billion. The equivalent number in March 2024 was ZAR 483 million. Please note that the ZAR 1.02 billion excludes the IFRS 16 liabilities of ZAR 254 million. Including IFRS 16, net interest-bearing debt for the period increased by ZAR 523 million. Our net interest-bearing debt to equity sits at 25%. We have met our covenants at 30th September 2024. We were pleased to generate ZAR 332 million cash from operations, a 3% increase over the comparative period. We paid ZAR 161 million dividends to shareholders and made acquisitions totaling ZAR 158 million. We received ZAR 25 million of dividends from Kian Ann. Please note the ZAR 703 million used to buy back preference shares. I now hand back to Steven.

Thank you, Nazlee. Operational segment review. Replacement Parts, Services and Solutions: Earthmoving equipment, RPE. This segment includes Kian Ann, ESP and the newly acquired NWB, amongst others. We will first report on the other parts businesses in the segment and Kian Ann will be reported on separately. Revenue decreased by 51%. This is the net impact of restructuring the KMP operations into the Kian Ann joint venture and the acquisition of the NWB business. Operating profit in this segment decreased by 6%. Net operating assets decreased to ZAR 343 million. The return on net operating assets improved from 30% to 41%. At the interim period, for the return on net operating assets, we calculate the operating profit on a rolling 12-month basis. Please see how we determine sustainable operating profit for the purpose of determining our returns. The adjustments made to operating profit with reversal of ZAR 3 million of the PPA amortization of the acquisition assets on NWB. Earthmoving, which includes mining and construction, is 100% of our market in this segment. All our revenue in this segment is from Parts. South African businesses continue to perform well, and ESP continues to identify and supply new customers as it increases product offerings to meet changing markets. The U.K.-based NWB acquisition is providing a positive return on investment and is performing above expectations. Invicta owns 48.8% of the Kian Ann Group. These results reflect the full Kian Ann Group and not the Invicta ownership interest. These results are presented in Singapore dollars. Revenue was 16% higher than in the prior period, primarily due to the inclusion of KMP's operations post the restructuring on 1 April, as previously mentioned. Operating profits increased to $17 million. Notwithstanding the market conditions, Kian Ann performed well. Specifically in China, we were able to achieve an appropriate gross profit in the KKB manufacturing entity. Net operating assets, which include net cash of $65 million, remained flat at $206 million, and our return on net operating assets was 14%. Please see how we determine sustainable operating profits. The adjustment in Kian Ann was a reversal of the amortization of the PPA assets amounting to $2 million. The biggest portion of our revenue in Kian Ann is from resellers. Heavy machinery parts account for 83% of our sales and automotive parts account for 17% of our sales. The KKB roller manufacturer in China and the distribution business in the United States continue to perform well. The tough environment we envisaged at the end of the year has persisted, and we anticipate that this will continue in the medium term. The internal restructure of KMP has been completed, and the Kian Ann Group now consists not only of its production in China and distribution in Southeast Asia and the United States, but now also has KMP Europe, Far East and United States operations supplying engine parts, complementing its overall offering. Further business expansion in the United States is planned in the short to medium term. Replacement Parts, Services and Solutions: Industrial consists of 5 businesses and includes BMG. Revenue for RPI was largely flat for the period. Sustainable operating profit improved by 16%. This improvement was down to management being able to contain costs across our businesses. Net operating assets also remained flat at ZAR 1.8 billion, improving our return on net operating assets marginally to 18%. Please see how we determine sustainable profits for the purpose of determining our returns. The adjustment made to operating profit was a reversal of a loss of ZAR 3 million on the disposal of a small business. Mining continues to be the biggest industry served by RPI, accounting for 20% of revenue. Other than mining, we continue to serve a diverse range of customers. The teams have done well this year in diversifying the markets we serve. Consumable parts amounted to 58% of sales and engineering, which includes value-added to products, amounted to 42% of sales. Our business in Africa make up 20% of the segment. Following the outcome of the South African elections, large project orders have started to filter through. Traditionally, we see supply to the aftermarket and general maintenance, repair and operations improving thereafter. We are evaluating our opportunities to strengthen our top-tier brand representation on the African continent. We are currently in discussions with potential partners to explore opportunities of establishing a footprint in Francophone Africa. Replacement Parts, Services and Solutions: Auto Agri. This segment includes our UPG businesses located in both South Africa, U.K. and Europe. Revenue for the RPA segment was 19% higher than the comparative period. The growth in revenue is due to Imexpart being in the current period for the full 6 months and only 3 months in the comparative period. Sustainable operating profit was largely flat at 2% lower than the prior year period. The movement is primarily driven by the strengthening of the rand over the period. Net assets increased by ZAR 35 million. Our return on net operating assets has decreased from 18% to 16%. Please see how we determine sustainable profits for the purposes of determining our returns. Automotive and transport are the biggest industries we serve in RPA at 88% of revenue with agriculture also growing into an important sector now at 8%. Consumables amounted to 98% of revenue and engineering, which includes value-added to products, amounts to 2% of revenue. Our businesses in South Africa make up 36% of the segment with the businesses in Europe and the U.K. making up the balance. We are pleased to announce that the mitigating measures that we have put in place in South Africa to improve stock availability stemming from shipping delays have been successful. We have expanded our house brand product range to cater to South African price-sensitive market where current market conditions are particularly tough. We continue to bed down the integration of the Imex acquisition, and we'll continue to grow the business with the introduction of our agricultural range. The CE segment consists of 4 businesses, 2 being construction and mining related and 2 being material handling businesses. Revenue for the CE segment was almost flat at ZAR 612 million. Sustainable operating profit was 37% lower than the comparative period. This is due to margin pressures that the business has experienced in the period due to an oversupply of product in the market. We believe that the oversupply is a result of caution from customers stemming from uncertainty around the South African elections. With the elections behind us, we are starting to see a normalized demand, and we think we are coming to the end of the oversupply in the market. Our return on net assets thus decreased from 26% to 18%. Please see how we determine sustainable profits for the purposes of determining our returns. Earthmoving, which includes products for the mining and construction sectors, amounts to 80% of revenue and material handling 20%. While parts, service and rental only accounts for 28% of revenue. We can cover 75% of the costs of our sea operation based on these revenue streams. As customers extend the lives of their capital equipment, our parts businesses continue to do well in servicing these machines. We are beginning to see good demand for big capital equipment with the overall market growing compared to the prior year. Key developments and transactions. It is key to our strategy to decare the balance sheet. In the period, we were able to redeem our preference shares out of the capital structure without having to raise additional ordinary capital. It was fundamental to take the preference shares out of the structure. In so doing, we've made multiple cash available for ordinary shareholders' dividends. As previously, we deducted dividends for preference shares from earnings before calculating the ordinary shareholders' dividend. Ordinary shareholders will see this full benefit over time. On 1 April 2024, we acquired 100% of Nationwide Bearing Company Limited. NWB was founded in 1992 and is a U.K.-based supplier of consumable parts to the earthmoving and agricultural machinery aftermarkets. Their product offering includes such items as bearings, belts, bushes and seals. NWB has its own proprietary in-house developed brand, NWB. The company is based in Doncaster, South Yorkshire in the United Kingdom. We paid GBP 12.4 million for the NWB business, which had roughly GBP 4 million cash on the balance sheet on the acquisition. Additionally, the business was able to generate sufficient cash to meet the first deferred payment to the sellers in September of GBP 1.2 million. And we believe that the last deferred payment of GBP 1.2 million due in March will also be able to be serviced from cash generated from the operations. We have thus outlaid GBP 6.7 million and NWB will provide earnings of roughly GBP 1.3 million for the year, an effective yield in pounds of 19%. Also on 1 April, we disposed of the KMP Group to our joint venture, Kian Ann in Singapore. We believe that the KMP and Kian Ann Group businesses should be combined, thereby creating a strategic focus in the industries and markets in which Invicta has significant experience and strong management capabilities alongside the strong procurement, network and manufacturing capabilities of the Kian Ann Group. With the cash realized from this transaction, we settled offshore debt facilities. We disposed of our Kian Ann warehouse in Singapore for SGD 63 million. We anticipate receiving a dividend from these proceeds of SGD 20 million by the end of our financial year. These proceeds will be applied against our debt facilities in South Africa to reduce our current debt position. As part of the disposal of this property, Kian Ann has moved their primary warehouse to Shanghai from where they will continue to service all of their customers. Kian Ann will maintain a head office presence in Singapore from where the Kian Ann executive and sales teams will operate. With the main distribution center located in Shanghai, the profitability of the Kian Ann operations can be improved. Also speaking to our customers across Asia, the vast majority of them were supportive of the move as they feel they can be better serviced out of Shanghai. Accordingly, we believe that the impact on earnings on the Kian Ann Group will be positively impacted. Through our Kian Ann joint venture, we have also recently established a new business in the United States called KSB, where we will look to distribute undercarriage components for the larger earthmoving equipment across North America. In our RPI Group, we've established a warehouse in Madrid, Spain. We have commenced trading at the beginning of November, and we hope that the business will grow with support from our Polish operations as we look to widen our distribution capability into Western Europe. Prospects and strategy. We aim to grow a diversified, sustainable replacement parts group, providing above-market return to stakeholders. We constantly review and restructure our existing businesses to ensure they achieve the desired return. We aim to have a geographical and sectorial diverse group within 2 years. Our objectives over the period will include managing working capital and optimizing operations, generating cash, managing the supply chain and logistical challenges, looking for appropriate acquisitions and new product lines for our existing businesses. With so much uncertainty in the world, we will continue to work hard on reducing our net debt position. In the coming months, we anticipate receiving our portion of the proceeds from the sale of the Kian Ann property. And this, coupled with the cash generated from operations will be applied to reduce debt levels. Our target is to be back to the March 2024 levels at the end of the financial year. Having a relatively debt-free business gives us necessary time to respond to difficult situations at the same time, provides the capacity for us to implement our acquisition strategy, should the opportunities arise. We are evaluating several opportunities on the acquisition front. And should we be able to identify suitable targets that align with our growth strategy, we will certainly continue to acquire businesses. Over the next year, we intend to roll out our BMG business into West Africa. We've identified a partner to work with in establishing the businesses across the region. Our replacement parts businesses are resilient and generate good cash with many of the sectors that we serve performing well in October. As a result of our relative financial strength, we can hold appropriate inventories to ensure that we can continue to service our clients without stock-outs and delays. Accordingly, we remain cautiously optimistic about the remainder of the financial year. We are extremely grateful that we've been able to deliver this performance to our shareholders and other stakeholders. Thank you to our loyal suppliers, customers and advisers for your continued partnership with the group. Our experienced, diligent and dedicated teams from the factory floors to the boardrooms, we thank you all for your efforts over the period. Lastly, we wish to thank our Chairman and the nonexecutives for their guidance and advice.

Thank you so much Steven and Nazlee. [Operator Instructions] Steven, we have a few questions. The first is from [ Charles Bowles ] saying, please, could you provide some insight as to the underlying drivers of the ForEx gains or losses? Are these largely attributed to trading activities or funding structures of the international operations? And he's referring to the ZAR 18 million ForEx loss from a ZAR 33 million gain in the prior period.

Good morning, everyone. Well, thank you for joining us for this morning's presentation. Always nice to engage in our shareholders. Charles, of course, through a whole like various items, but mainly, there was one significant event that was, we took a view going into the election that we wanted every bit of purchases covered in South Africa. So we took cover on everything that we were buying. And after the election, specifically after the establishment of the GNU, the rand went significantly, and that resulted in a lot of these losses that you're seeing in the foreign exchange line.

Thanks, Steven. Another question from Charles is what impact will higher tariffs by the U.S. have on the Invicta group?

It's something we've been focused on for a while. As you know, we've also opened a factory in Japan. Now we're not certain exactly which countries will be tariff traditionally, let's say more or less. But we anticipate that we might have to route what we currently supply from China via our Japanese factory. So that's -- we've really done all the groundwork and we'll just have to really add capacity in Japan that we turn off in China, and that would be our plan for that.

There is a question from [ Rowan Goeller, ] but it also pertains to the tariffs and the Japanese manufacturing, which I think you've just addressed. So I'm going to skip over that one. [ Charles Mooney ] has a question saying, please, can you confirm what the actual needs debt-to-EBITDA ratio was for the period and what the contractual covenant level is with the banks?

The net debt to EBITDA, if you look at our group, it could be significantly covered. It's probably close on about ZAR 1 billion -- or over ZAR 1 billion of EBITDA and the net debt -- the number have been disclosed. But the way our covenants work it actually just work on the South African balance sheet, and we have to be below 3 and we were below 3. And we have a lot of cash offshore that we are able to bring back into South Africa to satisfy the covenant if we need to.

Thanks, Steven. Rowan has a follow-up question asking what geographies are you focusing on for acquisitions?

So a lot of the acquisitions that we've looked at in the last while have been based in the U.K. and United States, and we continue to see interesting opportunities in those markets.

There's a question from [ Nina Cross. ] Can you share more detailed insights into the performance of the South African operations and how the South African operations performed compared to the rest of the group? What are the key drivers and the challenges in the region?

Okay. I think -- it was an interesting period of time. I think everybody is affected by these high interest rates and the markets are subdued in that regard. And that's in every geography where we operate. In South Africa, what we experienced was a dreadful April, and it surprised me because the public holidays, this year the Easter holidays were actually in March. So I thought we're going to get off to a good start, but we actually didn't. It was a really tough start. And then you recall the election was like on the 20th of June, if I remember. And there was really a holdback in the market on all big capital items. So we really had a tough start. And then post the election, and we started to see things get better. And that's really how the year played out. But it was a tough year in almost every geography we operate. It wasn't particularly easy anyway, anywhere. But we're still finding that the growth opportunities in some of our European and American businesses are better than what we're seeing in South Africa.

Thanks, Steven. [indiscernible] is asking, there's a huge discount, a huge discount in the NAV to share price. How are you planning to close the discount?