iOCO Limited (IOC) Earnings Call Transcript & Summary

What's up Solvers? It's you, our incredible team that makes days like these possible. We're not just your average company but a squad that works hard, plays hard and supports each other all the way.

Absolutely, Stephen, but you know what, we've got to stay focused on the next game too. There are always new challenges on the field of technology, and we're committed to tackling them head-on.

That's right, Megan. We'll stay resilient, agile and continue to tackle whatever comes our way. Our growth is like a Springbok rolling more, unstoppable.

So team, thank you for your dedication and phenomenal work over the past year. We are ready to take on the world. And just like our beloved Springboks, the best is yet to come.

So before we go through the details of our annual results and in remembrance of the French Rugby team, I'd just like to say thank you, Megan, for your selfless leadership and dedication to EOH's turnaround. I sincerely hope that our [indiscernible]. [Presentation]

Good morning, everyone. Thank you for attending the EOH Group annual results presentation. Although the South African economy has really struggled and the global situation has not improved either, EOH has managed another year of improved financial performance. As the legacy issues get significantly fewer and less material, the pure business performance is starting to reflect in our results. Key highlights for the year are significant and numerous. Most importantly, we have now created our main clusters, and they have operated for the first time semi-autonomously, very successfully. As a result, we will take the next big step in that direction in 2024, which will result in further operational improvements. Other than operational improvements, we are looking to realize at least ZAR 50 million of cost efficiencies through this decentralization process. Overall, operating profit was up 35% year-on-year, a herculean effort in these markets. This was largely as a result of the overall 3% growth in total revenue, but matched with slight reduction in operating costs as our efficiency measures continue to kick in. Our gross profit margins were maintained at 28%, which was very pleasing in this environment. However, looking at the various businesses, it is noteworthy that our iOCO South Africa grew revenue 6% despite the public sector headwinds. International grew revenue 23% as our growth strategy we invested in over a year ago, bore fruit. EasyHQ, the revamped Nextec business process outsourcing business and People's business successfully concluded its turnaround. And although revenue was down as we closed out the nonprofitable contracts, EBITDA was up a significant 33%, which is a real improvement year-on-year. This business houses our own group risk and compliance as a service IP that was created over the past 4 years and has already started generating new revenue from new customers. This is very exciting for us as the proof points are confirming the validity of the strategy. Our success for rights issue and renegotiation of our debt into a single lender facility has been key to our ability to accelerate our structural reorganization. Sadly, the rights issue was delayed by 8 months, which cost us approximately ZAR 60 million in interest that we had not originally budgeted. To add to this, we had a ZAR 49 million IFRS 2 adjustment for the specific issue to Lebashe, which was essentially a book entry to recognize the discount between the market price prior to the offer and the rights offer price. Without these 2 unbudgeted items, we would have made an IFRS profit for the year. The economy deteriorated in the second half for sure. And we have seen corporates, especially the smaller ones, struggling with cash flow. This has been evidenced in the increased working capital and something we are managing tightly. The biggest impact has been in the public sector; delays in contracting and payment. The business remains resilient despite the difficult economy due to the nature and diverse split of our revenue. 75% of our revenue is Services or Own IP, and therefore, very sticky so long as you execute well. This has been a big focus for us. Public sector revenue has now reduced to 13% as we expand our footprint into other markets and focus on deepening our wallet share with existing customers as well as on-boarding new names. Our people have continued to deliver world-class solutions to our clients in the face of an uncertain economy and limited global resources. This is why the T for talent and our GET strategy is so important. Looking at our divisional performance, the International Digital Enablement business continues its strong trend. We see great potential in this business with Brian Harding now relocated overseas to manage and grow this business as a sole focus. Our iOCO South Africa, which includes IT Infrastructure Services, Digital Enablement and Operational Technologies had reasonable revenue growth considering the store in the public sector technology investments. However, it took a significant ZAR 30 million hit in EBITDA due to the effect of public sector contracting delays and the reorganization of the Enterprise business. There are always ups and downs in our portfolio, but we continue to monitor and adjust as required. EasyHQ has reduced revenue but increased EBITDA by 33% as we close the nonprofitable business elements and completed the turnaround. Our biggest disappointment has been the Nextec infrastructure business that relies heavily on the public sector. ZAR 736 million or 12% of our revenue for a negative EBITDA of ZAR 51 million. This significantly affected our results overall and is an absolute focus for 2024. You will see as Megan goes through the numbers, removing this negative ZAR 51 million from normalized operating profit and the matching revenue, our normal operating profit margins are actually around 5%. This gives a much better view on the huge turnaround the team has managed on 88% of the business now. Operationally, it's been a exciting year for us. The restructuring of our business and executive alignments into separate business units has been successful and will have many benefits in 2024 and beyond. This structure provides more autonomy to operating units, allowing them to be the masters of their own destinies with a substantial reducing head office cost. They will also be able to grow at their optimum pace and invest according to their strategies. In a fast-paced changing digital world, running at your own pace is key for the success of each business. As mentioned earlier, our International business, which focuses on Digital Enablement in Europe and the Middle East had an excellent year with the investment over the past year of paying off. Our International client base has increased by 30% with a total of 18 reaching the GBP 100,000 pound club in the U.K., and we now have 46 clients, including picking up a few U.S. retailers, which is very encouraging as a result of a small acquisition called Hoverfly, that is an API visualization tool that speeds up devtime and improves quality. The most significant change was the pivot of Infrastructure as a Service business into the mid-market space to provide a larger client base that will make the business more diversified and anti-fragile, but also answers a growing need for consumers in the space. They have onboarded 12 new customers this year with their revised offering. This has driven their turnaround. The East West Africa rollout of the operational technology product suite continued its successful start and generated ZAR 51 million outside of South Africa, ameliorating the reduction of public sector work. Locally, this business struggled due to public sector spend not recovering, but we had a few pockets of success; most notably, our Mesh networking business in the mining sector. Our Enterprise Application business had a difficult second 6 months and not continuing the trend in the first 6 months. This has necessitated strategic interventions and they are undergoing change management processes. In total, we invested ZAR 94 million in growth initiatives across our businesses, which Megan will cover in more detail later. Our debt strategy has generated significant positive sentiment amongst our staff. We have scored well across the board in growth and efficiency, as you saw our significant leap in operating profit driven by both revenue growth and cost efficiencies. This process will continue strongly into 2024, now that we have left the past behind and can operate more normally. A big focus will be to normalize the head office costs. Megan will show later the significant drop in these costs over the past 3 years as the legal and debt issues have been closed out. We will target a further annualized savings of at least ZAR 50 million. We have the last of our noncore business sales underway, which should generate a further ZAR 50 million to ZAR 75 million in gross proceeds. Our employee value proposition is based on the design of a fingerprint in order to acknowledge the unique identity of each of our Solvers with the key pillars driving our employee value proposition being engage, grow, include and care. This year, we had a 78% response rate to our annual survey, up from 49% the previous year, and 92% of levers said they would like to return to EOH for the right job and 85% said they loved working at EOH. A huge congrats to the people team, who also got EOH, the international top employer certificate this year, which underlines our global best practices we have implemented. We also won the overall award and the 2 other subcategories at the gender mainstreaming awards this year. I am very proud of the new culture at EOH that drives diversity and inclusion. This is reflected on our people stats with 44% female and 58% AIC. The team also did very well in upskilling unemployed people and providing significant educational support. All of this can be seen in detail in our integrated report. Without applying the multiplier effect, we impacted 28,000 citizens in our country through targeted interventions. Our employee volunteerism program saw us exceed our moonshot of 1,000 volunteer hours. We have targeted partnerships in place with key stakeholders to ensure we solve for scarce skills and youth unemployment in our country. Some noteworthy ones include our partnership with WeThinkCode, a pioneering initiative aimed at addressing the scarcity of developers in South Africa. This impacted 50 graduates. Through Orange Memo, which is a youth empowerment program initiative designed to equip young individuals with skills, resources and guidance necessary to navigate their career paths successfully. Prime Stars, a green startup, a program focused on entrepreneurship and the green economy for youth. Being a positive contributor to our communities in South Africa is very important to EOH. There's a big focus on ICT and STEM skills development as well as initiatives with wider impact on early education and reduction of unemployment. The ICT industry as a whole has an important role to play, and we believe our initiatives are making a significant impact on many lives in South Africa. Suffice to say, when you invest in EOH, you are part of making a difference. We invest in what matters. Our employees and people mat to us. I've spoken about our EVP earlier. Achieving top employer status was very important as it says we are globally relevant. Our communities matter to us. Our Period Poverty project is a transformative program dedicated to addressing Period Poverty and empowering women and revolves around 40 young women who manufactured 2,250 reusable sanitary pads per day. This has been a huge success. Our women matter to us. EOH were finalists in 5 categories for the Accenture Gender Maintainstreaming awards. We won in the categories for women on Boards and empowerment of women in our communities. EOH also won the accolade of Gender Mainstreaming Champion for Southern Africa, the main overall award, which is a huge accolade and something we are very proud of. Our country matters. We invested in 341 unemployed learners with an overall spend of ZAR 22 million, which includes differently abled people. Finally, Megan will show you that EOH paid ZAR 168 million in 2023 for legacy issues and interest on debt, which actually is also a legacy issue. From this slide, you will see EOH over the past 4 years, generated ZAR 1.25 billion in cash flow, over ZAR 300 million per year. Granted some of that cash flow was generated by businesses that have been sold, but it outplans the utility nature of this business. As a legacy, including debt gets paid down, that cash will be available for investment and dividends. The nearly ZAR 1 billion paid to financials over this period shows why the rights issue was so important for investors. Once again, thank you for the overwhelming support. Interestingly, the SIU and interest payments for this year, if paid to shareholders, would have enabled a double-digit dividend yield. Thank you, and I will now hand over to Megan for the last time to [indiscernible] the counts, so you can see the true strength of the business. On a more personal note, as success only comes with a great team, thank you to Fatima who's made such an enormous difference to the culture of EOH. And now we'll go on and monetize her and her team's IP, they created in EasyHQ. A big thank you for Megan for walking this incredibly tough journey and for all her efforts and the values she has created.

Good morning, everyone, and thank you, Stephen. To start on our income statement, this year is the first time it's starting to look relatively normal with immaterial discontinued operations. The only one being our Network Solutions business, which we disposed off early in the year. On a pure IFRS basis, we have seen top line growth of 3% for continuing operations. Our GP margins have held strong at 28%. We have seen a 35% increase in operating profit and a halving of our continuing loss to ZAR 81 million. Over the next few slides, I will unpack the business performance, so you can get a proper view of operations. As you can see, the iOCO and International businesses are generally doing well as a whole. Our Digital business saw growth of 7% after taking into consideration a business unit they disposed off during the year. This business unit continues to see demand for digitization from its client base. IT Infrastructure Services saw a great rebound on the back of improved new customer logo acquisitions. The Operational Technologies business includes our Industrial Technologies and Mesh Network business as well as our manufacturer of commercial grade distribution boards and power components. We still have a dependency on South African public sector and SOE clients, but still managed to deliver good growth overall, including in East and West Africa on the back of our exclusive Aviva rights for those regions. Our Enterprise Apps and Software Reseller business were disappointing this year. We continue to receive pressure from the OEMs and our revenue pipeline in the enterprise application space has been muted, as well as losing a big client in January. We are working on turning around this business and have new management in place. Our international business had a fantastic year on the back of good growth in the Middle East. EasyHQ had reduced revenue. But on the next slide, you will see it has increased EBITDA as we closed nonprofitable business elements and completed the turnaround. The Nextec infrastructure and consulting businesses, although recording over ZAR 700 million of revenue delivered a loss as they still rely heavily on the public sector. Last year, we made a conscious effort to start investing in the business again, and this has both been done through OpEx and CapEx. Our digital business shows a decline in EBITDA, but taking into consideration that around ZAR 20 million was invested for growth in this business, this equates to an 8% growth in EBITDA. The IT Infrastructure Services and Operational Technologies business were both flat for the year at the EBITDA level. As discussed previously, the Enterprise Applications and Software business had pressure at a top line and squeeze from OEMs and cut hold with some difficult closeout on projects, saw a 22% drop in EBITDA. The turnaround in EasyHQ can be clearly demonstrated. Whilst revenue has declined, there's been a 33% improvement in EBITDA. The international businesses excellent top line growth flowed through with a 41% increase in EBITDA. As mentioned in the previous slide, the Nextec Infrastructure and Consulting businesses had a very challenging year. With revenue and profitability challenges, having recorded a ZAR 50 million EBITDA loss, this division is a key focus area for 2024 and is the last remaining business to be addressed from a turnaround perspective. Our continuing adjusted EBITDA was ZAR 322 million. We did have some once-offs in our numbers related to movements on legacy provisions and the impairment on our legacy finance book in tech leasing related to casino debtors who were negatively impacted from COVID and have not recovered. After taking this into account, we get to ZAR 351 million of normalized EBITDA at a 6% margin. Once we add back the investment in OpEx of ZAR 60 million, we have a 7% margin and ZAR 411 million of EBITDA. Our normalized operating profit is ZAR 229 million and includes an add back of the IFRS 2 share-based payment charge related to the specific share issue to Lebashe and EBITDA normalizations and then also the add back of goodwill. This gives us ZAR 229 million of operating profit, which is a 25% increase on a like-for-like basis in the prior year and a 3.7% margin. We have also shown the effect of investments in growth, giving a normalized operating profit of ZAR 289 million, which is a 4.6% margin. From an investment perspective, we invested over ZAR 90 million into the business with ZAR 60 million being in OpEx. Our Operating Technology business, and we invested ZAR 17 million as we grew out our East and West Africa business. Our Infrastructure business, we invested ZAR 25 million as we invested in our own data centers, and then internally, we invested in our own systems going live in March with a single in-the-Cloud ERP. This reduced our systems from 6 separate ERPs in the prior year. We have also invested in our data strategy, ultimately aimed at reducing the cost of storage and improving the insights we get from our data. We will continue to invest for growth in our business as we return to business as usual and implement our GET strategy. Overall, corporate costs have come down 44% from FY 2020. This continues to be a focus, and we would expect these costs to come down even further in FY 2024. In the past financial year, we spent ZAR 20 million on legal costs related to the refinance of our debt and costs related to legacy items. With our debt structure now finalized and legacy significantly reduced, we anticipate further reductions in corporate costs this year. Our balance sheet has strengthened significantly post the rights issue with a net asset value of ZAR 588 million. In terms of a strict interpretation of IAS 1, paragraph 72, the refinanced debt with Standard Bank of around ZAR 650 million is seen as current as of the 31st of July 2023 based on the interest rate cover ratio. With effect from the 6th of October, this debt has been reclassified back to long term. An error was noted in the definition of finance costs, as included in the second amendment of the common terms agreement entered into on the 31st of March 2023. This had a significant impact on the calculation of the interest cover ratio as interest on the old senior bridge loan prior to the refinance has been included in error. This error was rectified through an amendment on the 6th of October 2023. Standard Bank further agreed that there were never a default or an event of default that had occurred for the measurement date ending the 31st of July 2023. And as a result, no waiver was required. We have seen an increase in working capital investment. This has partly been due to top line growth, particularly in our International business. We have seen certain bridged up debtors also push out their terms and are paying later and often after month end as well as an increase in our book when we are servicing SOE in the public sector. The general tightening of liquidity in the economy has been a theme throughout this year with the current tough economic environment. The group continues to manage this tightly and on a weekly basis. Overall, we generated ZAR 430 million of cash flow, but did see a large portion being consumed into working capital for the reasons discussed earlier. We invested ZAR 90 million in our business through a combination of CapEx and operating expenses. After paying ZAR 49 million for legacy settlements and ZAR 119 million [indiscernible], we had ZAR 213 million of cash before settling debt. Through a combination of the capital raise and disposal of assets, we repaid ZAR 664 million of debt and finished the year with ZAR 204 million of cash. Our legacy issues have decreased significantly. The DWS and DOD SIU investigations are settled and we pay these on a monthly basis per the agreed settlements. DOD comes to an end in FY '24, whilst DWS closes out in 2026. Mehleketo is a rail business we put into liquidation after the sale of the business fell through and has historically been a contingent liability. We have now provided for it and are looking to close it out with the liquidator. We are very close to reaching an agreement with the liquidator. Our historical issue with SaaS continues and disappointingly remains unresolved. We have tried numerous ways to close this out, including through the courts, but have not succeeded to date. We will continue to pursue a settlement in the best interests of shareholders. On Autospec, one of the 3 primary contracts, was completed during the year. The conclusion of the remaining 2 projects has been impacted by challenges associated with Rand Water shutdown windows. And as a result, the timelines for completion have been extended. We remain committed to seeing these projects through to completion. On Pia Solar, we have made good progress in resolving functional issues on the primary Pia Solar projects and have substantial completion on both projects. We are solving remediation work on these projects with the expectations to close these works out in the coming year, thereby significantly reducing the risk, after which we will be left only with a limited warranty period to service. Looking at our debt, we now owe less than ZAR 700 million, which has been properly structured into long-term facilities. On average, our interest rate is now 11.5%, significantly down from our debt before the restructuring. Our finance charges are a far cry from where we start out in 2020 with over ZAR 300 million per annum and now down to ZAR 75 million forecasted for FY '24. Stephen has spoken about how much we have paid levers over the last 4 years. And with the right capital structure, the business is in a very different place to focus on the GET strategy. With that, I would like to hand over to Stephen for the last time as I leave EOH at the end of the month. It has been a great privilege to be a part of the EOH journey and the turnaround story. Thank you to Board for their wisdom, Stephen for his courageous leadership and to escort the finance team and all our employees. You have been an amazing team to be part of.

That outlook is a little murky for sure. We have both global and local economic and political uncertainty, which is pushing inflation and interest rates up. However, tough times create both opportunities and threats. We will do what we did in COVID, stay close to our clients and OEM partners to ensure we can support them in solving their digital transformation strategies. We will continue to save on admin costs to become more agile and allow investment and growth. In short, we will continue our safe-to-invest drive. Our employee value proposition remains key in our GET strategy, ensuring we are the coolest place to work to attract top talent and make the quality delivery to our clients. We are now 6 months post our rights issue, and we have made great progress in that short time. The ability to have a single bank has firstly, reduced our interest rate and secondly, allowed us to restructure the business to be way more efficient. The decentralization of the business is well underway and should be completed early in the new year following the consultation processes required. As I said, our aim is to save at least ZAR 50 million in admin costs and deduplication. Further savings will accrue now that the business is back to normal and not spending cash on large legal bills and debt restructuring. Our tax rate has also started normalizing with the legal entity restructuring. This has also reduced our exposure to EOH Mthombo significantly. There are a few businesses left to sell, and we are well into those processes and anticipate between ZAR 50 million to ZAR 75 million of proceeds in the next 12 months. In short, 2024 will be a year of consolidation and finishing what we started. It should be an exciting year. Investing in EOH makes a difference. Thank you.

Welcome to the live staff Q&A here for EOH for the 12 months to the 31st of July 2023. Stephen and Megan are here to answer any questions you may have, and you can enter them into the chat on the Zoom right now, and I'll feed them through to either Megan or Stephen before we get going. Just in terms of your announcement, I know you addressed the ELT last night. But any further words given your interactions with team members after your announcement on the extension of your contract for another 6 months, Stephen?