iOCO Limited (IOC) Earnings Call Transcript & Summary

Good morning, everyone. It is with great pride, I present this Return to Profit Results on behalf of all the EOH people. EOH is a story of continued improvement, most importantly, in the quality of earnings. As before, 2021 is much better than 2020, as was 2020 better than 2019, and all thanks to the Herculean efforts of our people and the incredible continuing support from our clients and our partners. All our loss-making legacy contracts and businesses have been closed, and now that has sorted out the cash drain. This may mean less revenue, but EBITDA has significantly increased from ZAR 19 million last year to ZAR 667 million this year. This is a margin increase from basically 0% to 9% in record time, and this is very close to our medium-term 10% target we gave you before. IOCO is already above 10%. So focus this year will be on getting NEXTEC into the higher single digits. Gross margins have improved from 22% to 28% through cost optimization and a much better contracting process. We have made great progress simplifying the business. And in so doing, we have created sustainable cost savings. For example, we now have halved our property portfolio. We've reduced legal entities to around 145 from the original 272, and we have a further 30 subsequently to close. Net working capital significantly reduced from around ZAR 400 million at half year to about ZAR 263 million. We have said previously that we are targeting a cash conversion rate of greater than 80%. We generated ZAR 663 million in cash from operations on an adjusted EBITDA of ZAR 667 million this year. This equates to nearly a 100% cash conversion rate. This has allowed us to return a further ZAR 433 million to the banks, and I'm proud to say due to great treasury management, our overdraft is now at 0. This has been stubbornly close to ZAR 400 million since I joined. EOH is now much better positioned to serve our fast-evolving client needs. To give you a view on how the business breaks down, we've split into the 3 main pillars. NEXTEC, although making a reported EBITDA loss of ZAR 35 million, improved from over ZAR 100 million loss last year. This loss this year was largely due to the 3 remaining legacy projects businesses that we have closed down. They accounted for a negative ZAR 45 million of EBITDA. So excluding the legacy, digital infrastructure broke even for the first time and the Learning and Development business made an ZAR 11 million positive EBITDA. One can see NEXTEC is well on the way to profitability. This was a monumental effort from the NEXTEC team. I can only say well done to them. IOCO is a well-balanced business now, having been organized into the engine room or Manage your IT Infrastructure, as I call it, and the digitize change your business, as I call it. This configuration is to ensure we support our customers fully. Ziaad, the new Chief Commercial Officer, who spent 13 years as the COO at IBM Africa will take you through the growth strategy and vision in a minute and then our IP businesses. This is just a sample of our scalable platform businesses. They require capital to grow and expand. They all currently have revenue profits and a track record, but they're hidden EOH and are not attracting the investment and valuations they should be. Furthermore, the management are entrepreneurs, and they require a very different method of incentivization to succeed. So I'll take you through a few of them. Nuvoteq is a medical trials platform. It's FDA approved, but it has a number of large customers. In fact, it ran one of the engine trials that has been responsible for over 100 million vaccinations. We need to increase the product stack using machine learning and artificial intelligence. Cerebra was born out of the strong audit trial and AR reporting of the Nuvoteq platform. We used it to digitize our governance processes. The idea is for it to become the GRC partner of choice for existing HR and ERP platforms. It already has some good customers in a very short time, as you can see. Impressions, this is a digital signature platform competing with DocuSign. I believe it has great potential as it is more of a consent engine. In a digital world, this will become increasingly important. For a digital signature to be legally binding, this requires an extensive process for certification, which is effectively a big significant barrier to entry for them. We have just taken this business to the U.K. Veritas, this is a platform that came out of our very own fraud business and currently uses artificial intelligence and machine learning to detect duplicate and fraudulent claims in the field of insurance and the motor industry. We really want to enter the medical insurance space and reconfigure the whole AI model. Symplexity, this is a large complex payroll management system for the mining and construction industry. That's a real proposition, is all the testing and consistency checking it does in the background to ensure duplication and over-claiming is managed properly. The idea would be to strip the core HR and payroll module out and combine it with Cerebra GRC model and Impressions, the digital signature model to take on the SME market. We can integrate more in our solutions into the core offering, growing existing footprint in the enterprise market and then become the dominant leader in the mining and construction space. I'm really excited about the new initiatives we have in the space as well, which we'll talk about in due course. Importantly, we continue to make huge strides in fixing our governance and culture. In May 2019, Fatima and team were faced with a sea of red and amber. The road to green has not been easy, but was a critical requirement to restore confidence in the business. This has been done in record time and is a testament to the true culture and tenacity of the EOH people. This is clearly a continued improvement process that we are close to completing our original road to green on our 7 pillars of governance. I would challenge any business to show this chart and see if they can achieve what our people have achieved in such a record time. This change in governance, this road to green has been reflected in the fact that we still have over 50 OEM partnerships having been through their government processes and renewed our partnerships. In fact, we actually added Salesforce and IFS as partners during the year. We have been sharing information with the Microsoft legal team post the Zondo Commission and will continue to cooperate with their internal investigation with the focus on restoring our relationship. Unfortunately, we can only move as fast as their internal investigation. Just as important is the fact that our customers have returned to giving us long-term contracts rather than just 1-year rolling renewals. This reflects the confidence of our customers are showing in our turnaround and changed governance profile. And this is important for when we budget last year when we budgeted because we didn't have these long-term contracts, our forward load was about 45%. This year, it has increased to just over 55%, and we'll continue to increase that going forward. Importantly, we continue to do great public sector work, having won over 400 deals worth over ZAR 3 billion with the public sector. We will continue to support all customers, including public sector through single centers of excellence to ensure right first-time delivery. Some details on our public sector deals, just for your information, for deals ZAR 5 million and above, the average period of contract is between 18 months to 2 years and the average deal size on these contracts is around ZAR 50 million with an average gross margin tending to be at the bottom of the private sector margins, mainly because of the large average size. As part of general governance, all material deals go through the Bid Review Committee, which assist in ensuring that the deals are competitively priced, are assured for legal comfort and subjects or deals to the risk and compliance checks. Furthermore, our revenue remains spread across all sectors, making the business very resilient as we have demonstrated through the very tough COVID trading environment. Services on our own IP remain the dominant driver of client revenue. This creates the client stickiness we have enjoyed. Clearly, increasing our international footprint over time is now key. As I said earlier, we have now closed all our legacy contracts satisfactorily. One remains in arbitration, but we are confident on the expected outcome. SIU payments continue on the 2 settled contracts. The Department of Water contract is under negotiation and should be closed relatively soon. The SITA-proposed blacklisting was an unfortunate situation but has been closed as expected. Only contracting parties can propose black listing to the DNT, to the Department of National Treasury. SITA has sent us a letter stating post a meeting with the Department of National Treasury, they've handed the matter over to them. And subsequent to that, Department of National Treasury wrote to us saying they had not received any black listing recommendation from any contracting party, and so the matter was closed. This is not surprising as DHA was a contracting party, and we have settled with the DHA after a year's negotiation and it had gone through the National Treasury approval process. Our purpose is to solve for our clients, our people and our communities. Our response to the unrest demonstrated our ability to leverage our technology, our IP and our business relationships. We were able to provide over 8,000 cooked meals prepared at restaurants that were otherwise unable to trade, move approximately 24 tonnes of groceries and facilitate trauma counseling for all our affected employees. We partnered with Live Life to clean up Alex Township collecting over 780 bags of debris. We also created a platform for Rebuild SA that provides a real-time link between volunteers, NGOs, sponsors and donors to channel much needed support to businesses and communities affected by the unrest. And through BUSA, the group supported more than 50 independent pharmacies to be reconnected and resume trading. This was all over and above the support we provided to starting MEC for virtual doctors on call and the Solidarity Fund. We have made great strides in our employee value proposition. Nearly 7,000 employees participated in our wellness engagements. We had 481 learnerships and internships with unemployed people. We had nearly 2,500 training interventions, which included the launch of our RiseUp Academy, which allows anyone in the business to reskill and upskill themselves. Over 96% of our people received increases between August 2020 and August 2021, and 80 unemployed people were provided with bursary support. I would really like to thank the Board for their huge support during a very difficult year, but also through a very difficult turnaround, the executive for their dedication and tireless energy in dealing with many difficult matters not they're making, our people for their extreme resilience and love for their customers that has made this turnaround possible. And lastly, to our OEM partners and customers for believing that we could turn the business around sticking with us and entrusting their IoT to us. We could not have done it without them. Thank you, and over to Megan for the detail...

Thank you, Stephen, and Good morning. I'm really pleased to be reporting on our 2021 results, which shows EOH's massive progress since the start of our turnaround strategy, which was implemented 3 years ago to rectify our inherited legacy issues. The positive and improved momentum of our turnaround is coming through in all our key financial metrics where we have seen year-on-year improvements. Gross profits from 22% margins to 28% margins, EBITDA ZAR 19 million to ZAR 667 million this year and more importantly, an 8.5% margin, which is approaching our medium-term targets. Our HEPS loss last year was ZAR 5.34. This year, we recorded a ZAR 0.22 loss. The current year loss is mainly attributable to our inefficient legal structure and our legacy overindebted capital structure. From a debt perspective, we are now at ZAR 2 billion. ZAR 433 million paid this year to our lenders and more significantly, we have entered into an agreement with our lenders, which brings down the risk within our capital structure and creates more certainty on the way forward. We are also very pleased with the strong liquidity management and our net working capital, especially in light of the difficult economic environment. In 2019, we put up the slide to show what had been happening in the business. There was a large net asset value in the business, underpinned mainly by intangibles and goodwill, which in the services business doesn't make sense and a declining return on invested capital. The market capitalization took some time to catch up to what the return on invested capital was already showing and then started to decline. You can see our turnaround efforts since 2019 starting to come through with an improving return on invested capital. As part of our path to deleverage and creating a sustainable capital structure for the business, we are focused on exiting nonperforming noncore and certain IP businesses. We are simultaneously focused on doing good business with the requisite margins that ultimately deliver shareholder value. These deliberate measures have resulted in total revenue decreasing to ZAR 7.9 billion for FY 2021 from ZAR 11.3 billion in FY 2020. Businesses disposed off and the closeout of legacy loss-making contracts accounted for approximately 75% of the revenue decline. However, even though the revenue has declined, you can see the quality of earnings coming through in the numbers. Gross profit margins have increased from 20% in 2019 to 28% in 2021. Operating margins have increased from a negative 29% in 2019 to 2% positive in 2021, and our EBITDA margins have increased from 3% in FY 2019 to 9% in FY 2021. From a revenue perspective, when we look at our base revenue, which represents the ongoing revenue from our iOCO, NEXTEC and IP businesses, we have seen a 12% decline. The decline in revenue has been as a result of our hardware sales declining, where we see a move to the cloud as well as a chip component shortage and then from clients in the industries that were most severely impacted by COVID. IOCA is our go-to-market for our systems integrated business. Our technology business comprises our hardware sales business, combined with our OEM software reseller and enterprise application business. We have seen a decline in revenue, as mentioned from hardware. We have quickly adapted to the declining revenue trend in the past year by taking costs out of this business while still being able to maintain healthy EBITDA margins. Our digital business performed well and sits at the heart of the Fourth Industrial Revolution. Our management operator Network Services business performance was disappointing and was significantly impacted by COVID and customer churn. The business has responded by pivoting to deliver infrastructure as a service and more on a consumption-based model. This is an area where we have significant fixed costs and have to ensure the business is antifragile. Our OKS business also posted good margins and contains some of our early-stage IP businesses, the likes of Nuvoteq and Symplexity. Digital Industries continued to perform well with good margins and growth from the prior year. We have a strong relationship with AVEVA and are looking to grow our relationship across Africa and into the EMEA region. Other comprises public sector, which is largely closed out. From a NEXTEC perspective, this is where all our turnaround efforts have been focused. It is not neatly divided into 2 parts: people and digital infrastructure. The turnaround of the people business is showing through in the current year with a positive EBITDA. There is still work to do to show improving margins, but the momentum is building within the business. The infrastructure business is where our more complex legacy issues have set with EPC type of projects, including Pia and Autospec. These are approaching completion, and the business has been significantly derisked. Our focus this year has been on taking costs out of the business and creating an anti-fragile business. Compared to the prior year, we have seen a 27% decrease in costs relating to our remaining cost base. We have also seen a significant reduction in noncash costs, which is made up mainly of depreciation, amortization, impairment and loss on sale of assets. Our EBITDA adjustments have come down significantly. Depreciation and amortization is down as a result of historically a large portion of this coming from our IP assets. Going forward, we would expect depreciation to track 3% to 4% of revenue. Impairment losses have also come down significantly, which is made up largely of goodwill impairments. Historically, the group has reported our normalized EBITDA, which stripped out one-off items and noncore business lines to be closed. The group's normalization adjustments have decreased materially in FY 2021, resulting in a negligible difference between adjusted EBITDA and normalized EBITDA. Consequently, we will guide the market on adjusted EBITDA as a performance measure going forward. For 2019, you can see the significant decline in normalization items and the reduction in losses from noncore businesses to be closed. Historically, the significant adjustments have been as a result of noncore businesses to be closed and impairments of assets. Moving to the balance sheet. From a debt perspective, we have seen a steady decline, where we are now at ZAR 2 billion of debt owing to lenders with 433 million paid to lenders in the past year. We are in the final stages of closing out Sybrin, which will reduce the debt further in the region of ZAR 300 million. We have also entered a new common terms agreement with lenders, which significantly derisks our capital structure. The CTA provides for a ZAR 500 million senior 3-year facility and a ZAR 1.5 billion bridge facility. Over time, our optimal net debt-to-EBITDA target would be in the region of 1 to 1.5x. Our EBITDA to operating cash conversion has been close to 100% for 2021. Significantly compared to the prior year, our cash generated from business as usual is ZAR 126 million positive. This is after paying interest and taxes significantly compared to the prior year. Our cash generated from business as usual is ZAR 126 million positive. This is after paying interest and taxes and compared to the prior year, where we were ZAR 49 million negative. We had outflows of ZAR 273 million related to iOCA legacy contracts and distressed entities in NEXTEC including advisory and retrenchment costs. Going forward, the iOCO onerous contracts have been closed out, and we are expecting to claw back a portion of our cash costs. From a debt perspective, we paid ZAR 475 million, which includes vendors for acquisition and other debts related to mortgages and project finance. ZAR 433 million was paid to lenders after receiving a net ZAR 214 million from the sale of assets. I'm particularly pleased with our management of liquidity and working capital this past year, especially in light of the tough economic environment. Our net working capital was within our expected levels at ZAR 263 million, and our debtor days are sitting at 65 days, which is consistent from the prior year. Looking at the long-term trend, we have reduced investment in working capital by 83% from ZAR 1.5 billion in 2018. What is pleasing to see is as we do good business, it is coming through in our reduced credit risk with our ECL provisions declining from 18% to 15%. Unpacking our provisions, which represent legacy issues we have or are closing out and the expected outflow as a result. This comes through in our cash flow as legacy outflows, of which we had ZAR 270 million in the past year. In the current year, we released ZAR 91 million of provisions, which was a result of better outcomes than originally anticipated and paid in the region of ZAR 250 million. We have also shown what we anticipate the outflow to be in the coming years around ZAR 80 million for the next 3 years and then ZAR 40 million for the 2 years thereafter. Over the past 2.5 years, we have set out to deleverage through the sale of assets. Some of our more significant asset disposals are shown and give an indication of PE ratios achieved. In closing, our priorities for 2022 remain continuing to focus on quality of earnings and doing good business, optimizing our capital structure appropriately for a large services business. This past year has seen us come a long way and in creating efficiencies in our business by doing what we do best, digitizing our business. With that, I would like to introduce Ziaad Suleman, our Chief Commercial Officer and industry veteran and also the Chair for South Africa for 4IR at BRICS.

Good morning, and thank you, Megan, for sharing the fantastic news that we've returned back to profitability. My portion of the discussion is really an exciting one, which talks about the go-to-market strategy, our value offerings, our solutions as we traverse the market and take great solutions to our customer set. Overall, the ICT provision from an EOH perspective is one about providing solutions and offerings across the value chain of ICT, providing an end-to-end capability. And really, this is led by advisory. Our ICT advisory capability is centered around architecture, which includes human-centered cultural aspects so that we ultimately have both man and machine working together. We have a significant change in the way we go to market, and this is in the form of the engine room of where we've combined and bundled a number of offerings in the form of a provision that makes sense for customers. In the engine room, we have a cloud provision, manage and operate. We have cybersecurity as well as networking solutions. And what this allows us is the capability of taking a bundled offering to a customer and pretty much providing everything as a service. The network solution capability allows us to make sure that we have adequate connectivity linked into the back end of a customer. Our compute capability allows us to utilize the data center services, end user workspaces, provide for IT management and security, but most importantly, making sure that all of this is combined with a fantastic layer of security where we can look at security advisory but together with operating centers and secure access services. This is ultimately brought together as part of the transformation journey around enterprise applications and software reselling, which then takes us to the next journey into the digital landscape. And by utilizing digital, we are able to enable the customers business through a number of different facets, the first being around data where architectural design, integration, implementation and data managed services form a key portion of leading in towards analytics and automation. And automation is a critical portion because it allows for us to implement and create a digital workforce. Very importantly, we are often asked by customers around our application development qualities. And in this regard, I'm very pleased to say that we have a business that is thriving. We are often asked by customers around our application development competency. And I'm very pleased to say that this is an area of growth, which is exponential for us in our business. It allows us to work with customers in order to digitize their environment, to customize their needs and ultimately make sure that we service their needs in solving solutions. In this regard, our DevOps, our quality assurance and our application outsourcing is a growing piece within a fantastic jigsaw. Our software reseller business, again, allows us to export local representation and our reseller capability of proven OEMs, which includes the areas of Micro Focus, Broadcom CA, ARCserve, Infor, Click and many others. Quality Assurance is a key portion to our lead and our technology independence and our full service offering in this regard really allows us to leapfrog and service customers really well. Digital industries for me is a really exciting portion of where we harness the power of operational technology and combine that with the capability of information technology. Under our operational technology piece, we have great attributes in the form of industrial cybersecurity as well as network security, industrial supply chain optimization and asset management performance but all of this is underpinned by our capability in advisory, in our implementation capability linked to our fantastic skills as well as our managed services in order to support our customer base. As Stephen alluded to earlier in the presentation, we have our IP plays in Rocket Lab Ventures. In this particular area, we have fantastic IP coming through in the form of products such as Getspace, Covalent, which is a platform play, Impressions, which is the digital signature play and various others such as Symplexity and Veritas, et cetera. A core component of our business strategy is NEXTEC and NEXTEC provides us with both infrastructure and people solutions. On the infrastructure side, we have consulting, technology leasing, which is fundamental to changing the discussion from a CapEx model to an OpEx model. on the People Solutions side, talent is key, recruitment is key and making sure that we differentiate ourselves with our skills is important. So through this business, we are able to attract and retain key talent. We're able to also provide staff outsourcing. We have a component around PE advisory within South Africa, is critical to the business as well as being fantastic around packaging the infrastructure side with the people side to provide a holistic solution. Part of the NEXTEC story is a fascinating one and I often like to talk about real life scenarios, which make a meaningful difference in solving real-world challenges. And in the NEXTEC where we've solved these real-world challenges -- assisted the city of Cape Town to reduce their daily consumption of water through implementing our metering and monitoring solutions. The result of this was that the technology solution saved approximately 450 Olympic-size swimming pools usage per month. This end-to-end capability of EOH for me is remarkable. It allows us to keep up with the digital trends in the world of 4IR. Given our IT and OT capability, using our 6,000 strong permanent skills and another 3,000 contractors, we are well positioned to support our customers with fit-for-purpose solutions and offerings, which match and take advantage of emerging digital trends. Our clients are heading into a world where the convergence of technology is providing both opportunity for them and for us to be agile, relevant, essential and to add value and leapfrog our competition through differentiation. In this regard, for me, the EOH value proposition is driven by clear client-centric focus. We are well positioned to address both technology, industry and market trends. We have technological capabilities and skills to meet client requirements as they transform their business and migrate away from inefficient legacy systems. We have a strong basis within our South African business to expand our footprint in the EMEA region. We are able to double our revenue in the U.K. and Switzerland business within the next 3 to 5 years, leveraging off our digital capabilities, whilst expanding our reach into the African market through NEXTEC and into the Middle East and other markets. A core focus for us is to leverage across our various lines of business to ensure that our capability is both innovative, it delivers fantastic solutions that meet the needs of the customers, but also differentiates us and our customers in our market. As regards to our international footprint, this certainly gives us a catalyst for expansion. South Africa is being used as a base to serve Sub-Saharan Africa and beyond. In Middle East, we have a great presence in Egypt, Saudi Arabia and the UAE. We have approximately 170 clients and Egypt is well positioned to act as a hub for us as we expand into the Middle East. Our current offerings in this particular area include software reselling and digital offerings around application development, various portals and platforms and leveraging our own IP business as we drive opportunity and solve problems for customers. Our expansion opportunities in this area is extremely exciting. Here, we have plays in cloud and security where we also sell our own IP. We can offer far more in our digital industries place around operational technology and we're also using the application development services that we -- from South Africa that we are taking into the Middle East, U.K. and the EU markets from Egypt. In Europe, in the U.K. as well as Switzerland and Czech Republic, we have over 63 clients. We have a great operating model in the U.K. to springboard into Europe, and our offerings there are wide and range from everything from Microsoft licensing, consulting and advisory, cloud and security capability, some of our application management and DevOps, all the way through to new opportunities around own IP utilization, cloud consulting and utilizing and leveraging our skills base in South Africa into those markets. Finally, I'd like to share with you a day in the life of a South African citizen and how EOH has worked with customers in transforming the lives of our people every single day. The example that I shared with you is around Tembi, who wakes up in the morning and immediately looks at a phone and an SMS from a grandmother who's asking her for airtime. She buys the airtime from her mobile app. She then decides to log into a laptop and do some digital port -- pay for his son's rugby school camp. She then drives to work and passes by a pharmacy to pick up her prescription medication as well as a few other items. When she arrives at work, she logs on to our office network. She signs a few supply contracts digitally, and then she proceeds to have an online meeting with her colleagues. Tembi then receives an update from the insurance company to say that a claim has been approved, where after she then gets to a call from her tax consultant telling her that a tax return has been submitted successfully and that she will be receiving cash back. Just before leaving at the end of the day, she receives a reminder to complete her compliance training. She then decides to fly to Cape Town for her grandmother's birthday and buys some chocolates in the aircraft from the air hostess. Later that evening, sitting with her grandmother and her kids, she decides to watch some TV and enjoy her favorite beer. So the point of the story is that Tembi like many others, has enjoyed the journey of what EOH has provided. It allowed her to utilize the TV, enjoy her beer, getting her car repaired, being active in terms of her office work through a network and connectivity and so much more. Essentially, we deliver solutions to every major telco, bank and insurance company from the various retail giants, logistics firms, mining conglomerates and to another 1,000 major brands within South Africa and globally. This is truly a remarkable mega company with unmatched capability across all aspects of our economy. I now hand back to Stephen for the closing. Thank you.

Thank you, Ziaad. When I first joined EOH, I said I came because I believed we had a sustainable competitive advantage because of our breadth and quality of offering. This slide really lays us out clearly. We are on an awesome channel to market with over 5,000 clients discussing their strategy with us regularly. We have broad OEM partnerships to cater for our clients' needs across the stack, and this is what creates those relationships. This is only possible with over 6,000 quality full-time employees with over 500 partnership certifications supported by around 3,500 contractors or with an ability to serve the EMEA region at a low cost point. Additionally, we have all the IP internally gleaned from our sector coverage to create future platforms with our clients or on our own. This is going to be an exciting migration to everything digital, anywhere as a service. We are ready for sure. Our strategic pillars reflect where the market is and where we are in our journey. Clearly, we will add further capability over time. Our strategic pillars going forward relate to our strength in the operational technology world of industrial automation, our organic expansion in the U.K., Europe and Egypt into the Middle East off existing businesses, taking South African centers of excellence to existing geographies and clients. We will continue to refine our OEM partnership strategy to ensure we are offering the best of breed to our clients. We will expand our current IP and capabilities to provide infrastructure, cloud and security as a service, largely focused on the large and mid-cap market, basically just below the multinationals. We will focus now on building out our scalable platform offerings to ensure we future proof the business as things tend towards us everything as a service. Our focused go-to-market team will drive the solutions, our long customer-centric lines to ensure we remain relevant, but build once and use 1,000 towns rather than continually reinventing the wheel. On our long-term ownership and capital structure, we're working with the banks to establish the best way forward. There are lots of different parts to an optimal capital structure that we haven't yet had the bandwidth to explore, including potential equity partnerships. The banks are comfortable that we can find the optimal permanent capital structure, but we will need input and approval from our shareholders in terms of the process and the structure best suited for the business to follow. There are lots of options coming at us, for instance, over the longer term, may be a 51% B ownership, may be the appropriate structure to pursue for a services business like ours that is extensively servicing the government and large corporates. We've got a number of people who are interested, but we need to have this discussion with our shareholders because the last time we did a deal, a number of the shareholders said they would have liked to have access to that discount, and they weren't that happy. So we have many options and some way to go with all stakeholders to really get this process better done, but we are clear. With the legacy issues behind us, finding that optimal capital structure is now our central focus. In closing, I would like to thank the Board for their huge support during a very difficult year, but also through a very difficult turnaround, the executive for their dedication and tireless energy in dealing with many difficult matters not of their making, our people for their extreme resilience and love for their customers that has made this turnaround possible. And lastly, to our OEM partners and customers for believing we could turn the business around sticking with us and entrusting their IT to us. We could not have done it without them. EOH is a business that has turned to profit in record time. We have optimized the business to service our customers better in this fast-digitizing world. And by taking out the necessary costs and managing the business better, we have turned basically all our EBITDA into cash, allowing us to service all our operating needs, including CapEx, interest and tax for some spare to repay our legacy issues. You saw this in Megan's slide, these legacy issues are well under control. The year ahead is very exciting as we focus on growth into a slowly reviving economy. It always seems impossible until it's done. Thank you.

You've just been presented by the very team before me. We've got Megan Pydigadu, the Chief Financial Officer; Stephen van Coller, who is the CEO; and Fatima Newman, who is the Chief Risk Officer; Ziaad Suleman, who is the Chief Commercial Officer. So we've seen a number of questions coming through on the screen, Megan, and also a number of exclamations of approval and a lot of those driven internally. How do you feel seeing that coming from the internal complement today?

Well, so I think, first, to shout out to our amazing EOH team and family. It's because of you were here today. I mean, it really has been such an amazing turnaround in such a short period of time. 2 and half years ago to where we are today, the fact that we've landed ZAR 147 million profit. It really talks to our purpose of solving and our EOH team coming together. So thanks to all of them. And I think it demonstrates really to the market like that we are one and we are a team.

So first, I'm going to come to you here in terms of one of the slides that Stephen presented, we saw a road to green, which was that clear picture of the red to green. That's really been your ambit to this point, and I really want to understand how digitization has been part of that journey and whether this is something you can do for other companies.

Thanks, Brennan. And I think going back to Stephen's earlier point that one of our philosophies is to build once and to use 1,000 times. One of the learnings as well for us was that in our quest to try and solve the issues that we were facing, we had incredible talent in the organization from a digital and a tech perspective. Our approach then was to employ a multidisciplinary team from a technical point of view and really to put those 2 things together and to use the technology for what it does best, which was to go gather the information to simplify it and to store it and to play people to their strengths, which was to analyze that data to consolidate, to engage and to put a meaningful plan together where we ended up with something that we do believe other organizations can use across the corporate landscape and really, really proud of what our teams have achieved from a digital perspective.

Stephen, from Martin, the market requires revenue guidance for the next 2 years to see how the gap of sold businesses are going to -- or is that gap is going to be plugged effectively. What are the aspirations for the top line going forward?

The aspirations for the top line are always going to be partially linked to how the economy recovers. We are a big business. And so we need the economy to recover. That's the first bit. And we're fairly confident from what I've seen that South Africa slowly bring itself out of that. And so hopefully, we can then ride on that wave. But the second thing we've done, which I think is really important is getting ourselves to the state where we've now cleaned up the business internally. You can actually use it, it's like when you arrive at your holiday home and your kids are at a party there, you can't go and enjoy your lounge because it's full of mess. You got to clean it first. We've done that, and we're now sitting there. And so with Ziaad coming with his long history in the industry, we can now drive that growth. And so Marius obviously set it up in the beginning and now we can actually drive customer solutioning, drive new customers and Ziaad's already started that with his whole team. So I'm pretty excited about that. And then the third bit that we haven't been able to do is to really invest in our geographies. We got a great business in Egypt, but it's been limited in its product capability. We've got all these centers of excellence in South Africa. We can now start delivering those and we've already started with our cloud and our DevOps there. Ditto for U.K. and into Europe. Ziaad gave a good description. We've got existing customers here. We just got to broaden the wallet. And then the last bit is now that we're generating cash, we can start investing in our IP businesses like our digital signatures business, like our medical trials business, like the Cerebra platform that Fatima and team have built. We can now actually do something to create growth. And so this is just the beginning, and that's what really makes me excited.

So, we had 13 years with one of the big global heavy weights, IBM. Do you think EOH can run with the big boys?

Absolutely. I have absolutely no doubt and that's one of the reasons why I'm sitting here. I think this company is perfectly premised to really take off. When you look at the capability that I spoke about, the end-to-end capability, everything from hardware to software to great OEM relationships, a great 6,000 strong people base, fantastic talent, the ability to play in the digital space around 4IR, all the capability around data, AI, security, exponential technologies leading in towards blockchain and IoT, we are perfectly poised to take advantage of the capability that this company has to serve our customers and take them forward. I have no doubt about that.

Megan [Fernando Moreira], can you comment -- well, actually, I'm going to reserve that EOH and Microsoft for you in a moment as yet but I wanted to come to the funding cost. This is from Munira Ahmed. Can you talk to the funding costs on the new CTA? You previously had very high funding cost and I think, Stephen, you can follow on CTA. So Megan if you can kick off.

Sure. So I think for us, it's been a milestone in terms of the fact that firstly, the lenders are willing to now give us funding from a more long-term perspective. So we've got a senior facility and a bridge facility. But that being said, the cost of funding is still expensive and is around the 10% but from our perspective, we're happy that we can start where we've derisked the capital structure, and we can also start looking forward in terms of what we ultimately do around our capital structure.

Fatima, in terms of the SITA potential blacklisting, was it ever really on the cards? I mean it was pretty much clear and done and dusted when Stephen did his presentation, but perhaps you can come in as Chief Risk Officer.

Brennan, I think what's important are 2 issues really. So one is an issue of substance and one is the issue of process. So from a substance point of view, whichever entity is going to propose that blacklisting needs to have an issue of substance. From our perspective, we have dealt with all of the legacy issues. And as part of the investigation, whatever we had found, we were quite transparent and open with National Treasury in sharing all of that detail, including sharing our plan in terms of what we were doing, in terms of addressing the issues of the past. The second issue goes around process. So when an entity is proposing blacklisting, there's a very clear process as prescribed in the regulations of what that entity needs to do. They then put their story forward to the national treasury. They go through a process of validating the issue that as it's been put forward and the entity under scrutiny then has the ability to respond to that. So from our perspective, from a substance point of view, we don't believe that there was really any hook or anchor to begin with. And from a process perspective, there wasn't really any process for National Treasury to follow. You would have seen that we had published several updates from the sales point of view but...

But the matter is clearly behind you. It never was really an issue.

That's our stance on the matter. Exactly right.

Stephen, I did say I was going to come back to you on CTA. Lots of questions coming through in terms of the optimal capital structure going forward. Perhaps you can just weigh in here in terms of how that process is going to unfold.

Yes. So it's interesting. We sit in a position now for the first time that we've got 2 clear audits behind us, 2 unqualified audits. So our balance sheet and our numbers are now, you can believe that. I mean there's no adjustments and things like that, that we're putting through, and this is what I think is a huge milestone for us because if you want to value the company, you can go and have a look at it, it's there. We don't have to make any adjustments on. So I think that's a really important point. The second important point now is that we've set a baseline and we can move forward. So you can see exactly what the company can manage and what the future can look like. At the moment, we're paying all our profits to the banks and as Megan said, it's costing 10%, and I know some of our shareholders have an issue with that. So we have to go and have those conversations. But there's lots of bits to put together. There's lots of different pieces of capital structure. There's subordinated debt. There's obviously the bank debt that we've always said we want to get it down to about 1x EBITDA and we also need to get our shareholding right. And that shareholding is both from strategics and also from our current owners. And so these discussions will start, and we'll see exactly what that looks like. We have to have the debates at the board. We haven't really had time to do it and this whole cleanup has been, especially in such a record time, has been pretty time-consuming. And so now we've got time. We've bought ourselves time again. The banks are happy with the options we've put in front of them and this is why they're happy to give us a long-term capital structure. And for me, and I'm sure for Megan and for Fatima being Executive Directors, we have now got current assets exceeding current liabilities, that's a pretty cool thing. We've got options and so we're going to now start exploring those options. We'll discuss them with our shareholders and over the next 12 months, we'll come to a conclusion on it. So that's pretty exciting.

So Ziaad, you referenced a pragmatic visionary commercial go-to-market strategy. Let's put Microsoft into that discussion as well because that was the question that came through from Maria. Can you comment if EOH is talking to Microsoft to renegotiate the agreement.

Yes. So I think Stephen alluded to it earlier in his presentation, where we do have an interest of engaging Microsoft with respect that they have a process that they are currently following. And until their process is not concluded, we are able to conclude on our side. But I think the relationship is an important one that we'd like to return to, and it's one that we feel, together with our other strategic partnerships that we'd like to take to market. So with our end-to-end capability, adding in Microsoft back into our stable adds extra impetus for us, and we're certainly welcoming that discussion, hopefully in the near future.

Stephen [Shawn Cross], will there be a rights issue to pay down the debt?

As I said, Brennan, we have to go through the process. There's lots of options we've got. We need to have the discussions with shareholders and see how they want to manage it because at the end of the day, you've got to split up any profit or any cash, excess cash flow you've got between investing in the business, your people, your funders, and your shareholders, and that's going to be the balance we need to debate with them. So there's a bit of water to go under that bridge first.

Martin. Operating profit from continuing ops is only ZAR 36 million compared to ZAR 110 million from discontinuing operations. Is this correct? And if so, how are you going to fill the gap?

So that number is correct. I think to understand our discontinued businesses relate largely to our IP businesses. But then when you look at our iOCO business and our NEXTEC business, which form part of our continuing business in the presentation, we unpacked the fact that NEXTEC is still turning around, and it didn't really contribute any EBITDA this current year. We are expecting that it will contribute. iOCO has been performing well and is hitting the type of margins we'd like to see in our ICT business. There is room for growth. I think we've shown where the growth opportunities are, what we've done with the IP assets we've disposed. You can see the type of margins and good returns you can get. And if we've got the opportunity to invest in some of our early-stage IP businesses and really ramp them up and do what we did in the other IP businesses. I think there's opportunity for growth from an operating profit perspective.

Peter Kromberg. Stephen, what is EOH's targeted optimal leverage of gearing for the future? And when does it hope to reach this optimal leverage?

Yes. So Brennan, we've talked about 1.5x EBITDA as being the sort of maximum and optimum, been about to 1x EBITDA to net debt. So we're going to continue to go down that path. We do obviously have our sales in the pipeline that sits in the discontinued operations. You can see the NAV that we subscribed to it, and that's based on what we think we can get for selling the businesses. You've got cyber, in that there's just 2 more competition. Country's Competition Commission approval is needed. I think it's Zimbabwe and Zambia, that will bring in about ZAR 330 million. We're very far down the line on information services, and we'll see if we can close that out. That's about ZAR 100 million EBITDA business. And then there's a few other bits that we're doing. So I'm hoping over the next 12 months when we sit here next year, we should have closed that process out, and that will then bring the debt into line.

Megan, a lot of questions coming through on normalized EBITDA going forward, including Munira. Can you give us a sense of where we are headed. So a realistic base.

Sure. So I think for the first time in this presentation, we've been able to show what our business looks like. And I think the big thing for us was the fact that historically, we've always had to have these normalization add-backs. And we've stated that going to the market, we're going to use adjusted EBITDA as a measure. That's actually what the business has produced. And I think based on -- if you look at iOCO and NEXTEC what it's done, what the potential for the business is, I think that should give you a good sense of where we're going. We also said from an EBITDA perspective that our medium-term target is 10% and we had hit 9% this year. So I think those should give good indicators of what to expect.

Bettice Kaplan. What do you think is a reasonable target for iOCO revenue growth in the year ahead now that the business is stable. I'll look to both of you on this, perhaps you can go...

And once again, I mean, it's very much linked to the economy and your views on GDP. So traditionally, the ICT industry has grown at about 2% above GDP. So I think that's sort of a reasonable proxy. I'm obviously hoping with some of the things we're doing in region and some of the work that Ziaad's doing around go-to-market, we might beat that. Clearly, over the longer term, I really do want to beat that. Otherwise, we wouldn't be putting these things in place. It's just in this industry, and obviously, with COVID, things have been slow to happen. And I've seen -- I think we've seen that in a lot of industry. So I suppose a short answer, it depends on what your view on the long-term GDP prospects are in the countries that we're operating at largely South Africa...

Brennan, I'd just like to add. I think one of the big differentiators between this management team and the previous management team is that we do good business, and we chase good margins. And when you look at our GP, I think it's more about what we deliver from a gross profit margin perspective. You've seen that going from 22% to 28% and our EBITDA margins go from virtually 0 to 9% this year. So for us, it's more about that doing quality business, sustainable business that creates shareholder value over time.

So Ziaad, somebody had to [pick up] a chair of that 4IR BRICS digital economy. Can you explain 4IR, you must be the man.

Absolutely. Thanks. So 4IR essentially is the Fourth Industrial Revolution. If you go back in time from approximately 1770 to 1870 plus minus 100 years, the economies at the time was powered by steam, and that's what grew the economies. You then fast forward another 100 years. 1870 to approximately 1970, you had electricity coming in, which provided a great amount of automation and mechanization and the third industrial revolution from approximately 1970 into the early 2000s was really fueled by the Internet. And there was a lot more convergence starting to happen and all of those types of things. And then from just after the 2000s to 2020, where we currently '21 -- where we currently sit, we've seen even greater convergence, greater speeds of connectivity, masses of data as a result of all of the different types of applications coming through the devices, et cetera. And now we're really living in a true converged world. And what this means is that in order for technology to solve human needs, we have to make sure that we leverage the capability of all of these different devices with speed and with scale. So often when I speak, I speak about data in 3 forms. Data has volume. If you just think about your iPad, your WhatsApp, your e-mails to everything else that's starting to stream through. Then you look at the velocity, the speed at which it comes and then the variety. So if you just take data as an example, at a mass scale, you understand the complexity. Now if you overlay analytics onto that to rationalize what that actually means, you start getting some value. And then over and above all of those types of things, you need security to protect the data, people's interest, personal property, all of those types of things and you just become far more sophisticated...

And so -- and Ziaad, that's exactly why I'm getting my children to become data analysts because I believe...

Good Choice.

That is one of the jobs of our future. I'm going to talk to you more about that. Fatima, a question coming from internal in terms of whether EOH is now fully derisked.

That's a tough question. I think what we've built is for a purpose. I think it lends a lot of credibility with customer supplies, et cetera, OEMs in terms of where we stand. And I think the process is really starting to work where we're starting to pick up issues based on the monitoring that we do on an ongoing basis. So to the extent that we're able to rely on our processes, our people and our technology, I'd say yes, are we going to pick up any potential issues...

That's the point of having good processes so that you will be able to pick up those issues if they come to the fore early.

Agreed.

Megan, a question here from Abraham. In fact, I'm going to put that to Stephen. Does EOH have acquisition target, sir?

Well, I think that's a very interesting question because now that finally, we returned to profitability, we've now got a longer-term capital structure. That's clearly, as we have a look at how we expand ourselves, especially into new geographies, but also in the stack that's continually changing. You get new OEMs, you get new things coming in. We're going to need to make sure. We can either organically grow into those or we need to obviously plug those gaps, Are they going to be massive acquisitions? No, they're just going to be plugging holes and actually giving us the time to market. So yes, absolutely, we will start having a look at that as a way to increase the size of the business and make ourselves more relevant to our customers.

If I can maybe just jump in there. Earlier your point around the go-to-market, Stephen started talking about the growth. When you look at the go-to-market strategy, we have a clearly articulated strategy that we're taking to our customers. So we have a large customer base, which is built off our strategic accounts. We have a huge play around mid-market. We also have a new area of focus on the new business development and most importantly, strategic partnerships, which points to Stephen's point around growth. So he spoke about organic and inorganic growth. When you look at leveraging the new strategic partnerships that we are starting to build, which are new to the enterprise, it gives us great opportunity to take new offerings to new markets. And all of those things in harmony fuel the growth.

Megan, Munira is not going to let you get away without going into deep detail. So, I'm going to put another one to you, does depreciation guidance of 3% to 4% of revenue include lease costs.

No, it doesn't. So no, sorry, in terms of the depreciation, there is a portion of depreciation there. So yes, it would.

So he does put in brackets, so as much as disclosed, ZAR 137 million cash cost in 2020.

That ZAR 137 million, some of that actually relates to the capital payments. I think our lease costs in terms of depreciation were around ZAR 80 million, ZAR 90 million. That was the actual payment we paid to landlords, and you see that in the income statement in the form of interest costs and then also this capital cost.

Secondary listing, it was again Martin asking how you're going to leverage that secondary listing. What does it mean for EOH?

I think what we were trying to do and what we will continue to do is broaden our shareholder base. We have a very retail-focused shareholder base and then a few big institutionals. And over time, if you want to get liquidity into the share, you need to have a look at new investors, different investors. And that's what the secondary listing gave us is just an access to a different set of investors, and they're already trading a decent percentage of our shares on the secondary listing. And so that's quite important for us going forward.

Nick Kraker. This has just come through the book value for the available for sale operations is around ZAR 800 million. Can you give me some guidance on what these operations can be sold for? I'm looking at both of you to handle this.

Around ZAR [indiscernible] million.

Right on, Nick, you've got your numbers really down PAT on that instance. Then just another question coming through, I think, broadly across a number of different participants in this interview is the level of commitment. And we're going to close out on this as I've got the big 4 in front of me here. So I want to understand your level of commitment, I'm going to go, Ziaad, I'm going to start with you, Fatima, Stephen, I'm going to close with Megan. So it's really just your final statement to the market. We've had a great turnout for the presentation today. And I think it's just time to hand the mic back to you, Ziaad.

Thanks very much. Look, I joined from IBM because I believed in the project. When I sat with Stephen and the Chairman of the Board, I could see what was being done. I saw the great work having taken place over the last 24 months. And really, when I speak about the end-to-end capability, I see all the ingredients for a super fantastic business. And that's what I ascribed to, right? I ascribe to the challenge of the market, the growth, the learnings, the development of South Africa, making sure that all of these things come together for the benefit of us, our growth, our customers' growth, but also adding great ability and value to our ecosystem that we operate in. So I have no doubt that we're in a good space. I think our people in a good space. We're on the path of a great trajectory and a catalyst to really good things. So I'm extremely confident and I see a great future. Thank you.

Same has been a long 2.5 years in your portfolio.

It's also been a good 2.5 years. One of the reasons I joined and I joined out of financial services and telecommunications. And I think to Ziaad's point, the fantastic work that they're doing in the committees that he serves in, that technology and the Fourth Industrial Revolution is really where the world is headed. I look at how my children respond to these things from an investigation standpoint. If I look at the industries that we touch from a South African point of view, it really is quite systemic in terms of touching every industry and from a relevance and from an impact perspective, I really enjoy that. So my comment -- I mean, I'm really so excited in terms of where we got to. The number speaks for itself today. I really love the team of people that I work with. We have a fantastic board from a support point of view and from an executive management perspective and an [ExCo] point of view, we really have superb people, so really nice to be here.

So Stephen, now that this massive turnaround is now complete, have you just started?

That's exactly what I was --- exactly what I was going to say because the interesting thing is I came because I wanted to create jobs. I believe that one of the ways out of poverty, especially in South Africa with this big divide we've got from a [part] was to create jobs through the Fourth Industrial Revenue -- Revolution. The ICT industry sits at the heart of that. And EOH was always doing a good job. Unfortunately, I've had to be sidetracked a little bit from the confidence crisis that we dealt with, and then we had COVID, which we dealt with. And finally, we're at a position where we can actually aggressively do this now. And that's pretty exciting. So in my view, I've almost set the foundation to do what I came to do. It took a little bit of while, but we're here now. So I really want to continue on that journey because I think that's the exciting part of being part of EOH. So that's what I'm looking forward to going forward.

In terms of the financials, a turnaround in record time, did you think it was possible, 2.5 years.

I think 2.5 years ago, it was a tight situation to look at each other and think what have we got into like are we going to get through this. So I think at the end of the day for me, if there's one thing that EOH has shown is resilience, what teamwork means. It's not about the individual. It's always been about the team, and we have an amazing team and all our EPH people out there who are solving. And you can, like Stephen says, it's -- you can overcome and it's not done until you get there. And I think it's been a major achievement for us to get here. And I think just in terms of what everyone else has said, we have the ability to be a force for good. We see an industry that can democratize economy properly and we can disintermediate industries that haven't been accessible for a lot of our people in this country. And I think that's what excites me about where we are now.

Megan Pydigadu, Stephen van Coller, Fatima Newman and Ziaad Suleman, it's been a pleasure. Thank you very much. And thank you to our audience to join -- for joining us today for this live Q&A, bringing you the EOH full year results for 2021.