iOCO Limited (IOC) Earnings Call Transcript & Summary

Good morning. Thank you for dialing into the EOH Group Results for the Year Ended 31st of July 2024. We are very pleased to present you with the financial and operational results today. Ashona will take you through the financial results in detail while I will cover our strategy and operations, after which we will gladly take some questions. Please be sure to type your questions in the question box. A good place to start for those that are not familiar with EOH Group is probably a quick overview of who we are and what we do. EOH continues to be the market leader in ICT and an integral partner to our customers. You will notice that we have 4 major business groupings. If I start with Connected Industrial Ecosystems, that is a traditional OT business focusing on energy solutions, connectivities and operational technologies. Just next to that we have a business called Outsourced Knowledge Solutions which was formerly EasyHQ. Here we have the People Solutions businesses as well as HRM platforms and Fraud and Forensics. Naturally, we also have an Infrastructure Services business which is a very traditional infrastructure business which is augmented by our last pillar which is digital enablement where we focus on modernizing legacy estates of large blue-chip customers. In the past year, much has been done to further stabilize operations and reposition us for growth. Cost efficiencies are starting to materialize which can be seen in the results. In addition to much healthier finances, our financial reporting has improved and we are very gratified to note that major legacy issues have now been closed out. It is exceptionally important for a skills intensive business such as ours to retain those scarce skills that we need and it is a significant focus for us. We are, therefore, pleased to confirm that we have again achieved a top employer certification for 2024. Critically, we are now able to resume investment for growth aligned to customer needs. As I articulated earlier, we did an EasyHQ transaction and this is just a slide to remind you that while we no longer have the name EasyHQ nor GRC-as-a-Service, we still have 99% of the capabilities that we've spoken about before. I would now like to hand over to our CFO, Ashona, for the financials.

Thanks, Marius. Good afternoon, ladies and gentlemen. By the end of this presentation, we aim to provide a clearer understanding of our continued progress, key value creation initiatives and momentum in our businesses. We are pleased to highlight the significant turnaround underway. In this, my first report to market, I am pleased to report progress on various fronts. For the first time in a while, this year's financial results do not contain normalized accounting and the group has obtained an unqualified audit opinion for the fifth consecutive year. In the past year, EOH successfully addressed some of its capital structure, resolved major legacy issues, stabilized its financial performance, and in July, we rationalized to drive a fit-for-purpose structure and reset the strategy of investment for growth. These achievements are major steps toward the quest for financial stability and increasing investor confidence. In terms of the financial summary, the Group reached revenue of ZAR 6 billion despite a 3.6% decline from the prior year. From a continuing basis, revenue declined 0.3% compared to the prior year. This translated into gross profit of ZAR 1.65 billion with steady gross margin of 27.3%. Adjusted EBITDA declined marginally to ZAR 307 million, only adjusted for share based payment expense. Operating profit decreased by ZAR 23 million to ZAR 112 million, primarily driven by the underperformance in 3 business lines. This decline was further impacted by restructuring costs and the non-recurrence of one-off provision releases in the prior year. We reduced net finance costs by 28% to ZAR 118 million this year. The significantly lower charge stems from a reduction in debt through the rights issue and a further capital repayment of ZAR 41 million, as well as the refinancing of existing debt at improved interest rates. To further note that our finance cost for 2024 includes a one-off legacy charge relating to a prior year expense of ZAR 14 million related to the Department of Water and Sanitation, without which net finance costs would have decreased by 37%. Our tax efficiency is a key focus area as the Group improves its corporate structures to normalize the tax charge. We have further rationalized our legal entity structure during the year by deregistering 35 additional legal entities as at our result release date. This will reduce cost and complexity, in addition to optimizing the tax structure for the Group. EOH incurred a year-on-year headline loss per share of ZAR 0.0021, reflecting a significant improvement of 99% relative to the prior year's headline loss of ZAR 0.21 per share. The loss per share at ZAR 0.10 improved by 23%. We had strong growth in our International and Infrastructure Services businesses, which saw revenue increases of 27% and 5%, respectively. Our Digital business revenue also remained robust, demonstrating the potential of our investments in this area. Revenue declined by 15% in Connected Industrial Ecosystems due to the slowdown in the mining, metals and minerals market, impacted by lower commodity prices. This resulted in delays and deferments of connectivity, infrastructure and industrial power supply projects and contracts. Revenue declined by 12% in the Digital Business Solutions business where we experience loss of a key contract and slower closeout on system integrations. While we experience declines in Connected Industrial Ecosystems and Enterprise Applications, we have addressed these challenges through targeted initiatives, resulting in a considerable uptick in performance, specific to these areas in H2, which resulted in overall improved margins, despite the revenue decline in H1. We are pleased to note that the iOCO SA businesses has good pipelines and a positive outlook for FY '25. With the increasing need for cloud, managed services, AI, software development, intelligent data solutions and cybersecurity, creating accelerating demand for EOH's leading solutions. The iOCO International segment grew revenue by a sparkling 27% this year to ZAR 661 million, now contributing 11% of Group revenue from 8% a year ago. The expansion into the Middle East, Switzerland and the United Kingdom has exceeded our expectations and is an important source of further revenue growth potential and geographic risk diversification. In addition, we are starting to see an increase in revenue back into South Africa as we increasingly utilize the South African skillset and capacity abroad. This is particularly true as we see a growing trend in multi-business deals between South Africa and the U.K., as a shared partnership. We anticipate further growth from these initiatives into FY '25. From an EBITDA perspective, EOH achieved a ZAR 307 million adjusted EBITDA at 1.4%, marginally lower than the ZAR 312 million generated in 2023. We have had strong performance in Digital at 20% growth, Infrastructure Services at 3% growth and International at 18% growth, with some headwinds faced in the Connected Industrial Ecosystems declining 14% and Digital Business Solutions declining by 7% due to lower revenue. The EasyHQ cluster included the [ Highveld ] business unit where a one-off legacy balance sheet provision of ZAR 64 million was released in the prior year. EBITDA margins remained stable at 5%. In June of the financial year, a Board subcommittee was formed to turn EOH around. Key initiatives in July included business restructure and rationalization plans. The corporate and admin cost restructure has just been successfully completed, which is expected to result in cost savings of between ZAR 160 million and ZAR 200 million into FY '25. The rationalization incorporated the drive to ensure a fit-for-purpose corporate structure. In addition to the above, the current year's EBITDA reflects significant restructuring costs aimed at generating savings in FY '25. These costs are included in the EBITDA figure. When normalizing for the restructuring costs, the earnings present a clearer picture demonstrating growth. EOH has made notable progress in restructuring and stabilizing the business, positioning us for more efficient day to day operations while with promising growth potential. These are significant steps towards improving investor and other stakeholder confidence, giving us a strong competitive position in the market and setting the stage for future growth and innovation. Our balance sheet remains stable with a focus on value creation and liquidity preservation entering 2025. Key highlights include trade debt has decreased due to enhanced collections and lower revenue, goodwill reduction due to sales of the remaining non-core businesses, together with a slight impairment on the value of 2 businesses, increased non-controlling interest from improved Middle East operations, debt reclassifications to long-term liabilities and significant provision reduction, following the [ Highveld SARS ] resolution. We're well positioned for FY '25 focusing on value creation and liquidity preservation. Net working capital remains closely managed in the current environment, reducing by approximately 21% to ZAR 263 million in FY '24. The Group continues to manage working capital tightly. We are still seeing our customers push out their terms with cash not moving as swiftly in the economy. However, the key focus is to continue to enhance working capital management. Looking at the cash flow, from a cash flow perspective, the Group generated ZAR 171 million of cash from operations during the year, an improvement from the prior year, also paying 5% less interest and 9% less tax. The closing cash balance together with accessible facility is ZAR 436 million, as at 31 July 2024. We made a net investment in infrastructure maintenance assets and additional infrastructure of ZAR 64 million during the financial year. The successful rights issue that concluded in 2023, which raised a net ZAR 550 million, has been critical in rightsizing EOH's capital structure. With an improved capital structure in place and significantly lower interest payments to our lenders, EOH is now able to make proper long term decisions. This, together with the much needed resizing of the organization from a cost perspective, refocuses the Group on growth for the first time in many years. Debt as at 31 July 2024 was ZAR 644 million, after a further ZAR 41 million reduction through disposal proceeds. We will, together with our Board members and shareholders, continue to look at options to optimize the Group's capital structure. From a legacy payments perspective, EOH has managed to close out 2 of its significant legacy matters in FY '24 financial year, which puts the Group in a position to now focus firmly on further executing our growth strategy. In January 2024, the various EOH entities implicated in the Mehleketo matter and the liquidators of Mehleketo concluded a settlement agreement in respect of the ongoing dispute between the parties. The settlement agreement sees the various EOH entities, paying the liquidators an amount of approximately ZAR 49 million. EOH also reached a settlement with SARS regarding the legacy PAYE matter within EOH Abantu. During March 2024, ZAR 112 million was paid to SARS as the full and final settlement of the matter. The amount is in line with the provision raised and has not affected the Group's consolidated statement of profit or loss and other comprehensive income. Legacy payments are fast approaching their end, with final payments due to start closing out in FY '25. This is another important step forward as these will be the final remaining legacy issues and which will coincide with the conclusion of the strategic reset and restructuring process. I will now hand back to Marius and see you again at our Q&A. Thank you.

Thanks for the update on those financials, Ashona. I'm now going to talk about the strategy and operation. Our turnaround has taken the form of 3 phases. We have formed a special subcommittee with the Board in June this year that is specifically looking at business turnaround and growth. The first stage of structuring is to improve efficiency and reducing costs and that is very well advanced. The second and third stages of revenue growth and capital allocation are in their infancy and I will take you through the thinking on each of these slides. We have looked at our corporate and administrative structures and operations and have restructured and consolidated to simplify those structures to give us the most efficient platform from which to service our customers. We've also rationalized unnecessary duplication and improved inefficient tax structures. While the restructuring had an impact on our financial results in FY '24, we still expect to achieve somewhere between ZAR 160 million and ZAR 200 million of much needed cost savings into FY '25. Very excitingly, we have also proposed to our Board, which we will take to the AGM in November, that we want to change the name from EOH to iOCO. And when those requisite approvals are achieved, we will revert. On Slide 19, we've streamlined the business to be more competitive. Our natural industry rhythm is built on forward load, i.e., that is contracted, as well as pipeline and gap. We are in the fortunate position that we've already started FY '25 with more forward load than we did in FY '24. Pleasingly, the business units that have traditionally longer lead times had robust forward loads. Our pipeline is healthy and is weighted more towards the business units that have shorter conversion cycles. Our new structure has been designed with the aim of specifically unlocking the opportunities related to the IT/OT convergence, which we believe are significant. Continuing in growing revenue growth, we have created a CVE cluster. We invested in customer value enhancement capability to consolidate opportunities for customers at scale. They lead the demand generation from a solutioning perspective. With customers needing digital transformation partners, we believe that CVE will accelerate those opportunities. We undertook a highly successful large implementation which acted as the blueprint for establishing the formal capability within EOH. What we've also done, continuing in the customer segmentation piece, is analyzed all of our customers into various sectors and then also decided whether we would optimize, disrupt, ideate, innovate, grow or protect those customers. This is just an illustrative example of how we've tried to achieve that. As you can see here, there are sectors and as the customers move through their life cycles, we have mapped them accordingly. On Slide 22, we refer to customer relationships. This is all still in our quest to bolster revenue growth. EOH is in the fortunate position that it has a very large, diversified and loyal customer base that to date has been served by 1 or more of our existing business units. A significant opportunity exists for us to extend our relationships with these customers through our CVE solutions, offering a greater breadth of products and solutions and thereby providing valuable revenue growth opportunities with customers where we already had established track records. The new structure allows for far better engagement models as we leverage off these relationships. While the world of technology has many, many, many things going on at the moment, we have simplified on what we would focus on in the medium term. While we will do lots of other things within the industry and within our own business, in order to simplify the focus areas which will take us to the medium term, we have seen the rapid advance of AI. This has increased the demand for OT and IT services, data and compute power that's needed to be applying AI in business. Cybersecurity issues are accelerating and EOH's fraud and forensic capabilities have experienced tremendous growth. The revamped group structure will allow our own IP greater growth opportunities and we will extend new products and services as a service. This is just illustrative of how we intend to focus on the things that will get us to the medium term and grow our revenue. Lastly, I'd like to talk about our capital allocation. We continue to focus on bringing our debt down and managing our working capital requirements. Once we are comfortable, we have achieved that, we will start investing in a meaningful way again and will focus on 3 specific areas to maximize shareholder value. They will be selective acquisitions, investing in our International growth and possibly share buybacks. In closing, we are pleased to note that some green shoots are emerging in our economy which will improve business confidence and, with that, hopefully increased investment in growth. We certainly need our customers then to grow and for us to be their chosen digital transformation partners. Digitalization and technology are the forefront of innovation needed by companies to achieve this growth and our products and solutions are relevant to those needs. We have identified a range of strategic priorities for the coming year to benefit from a more robust economy. With the shareholders, Board and company leadership all aligned, EOH remains an agile business positioned for success in the years ahead. I would like to thank you for your support and we will now go on to questions.

Some questions have already started to come through. Let me just get straight into it. Marius, a question for you. We see you are changing the EOH name to iOCO. Tell us a little bit more about what went into that decision?

Thanks. I think it's been a long time coming. We spent an inordinate amount of time as iOCO. Many of our customers have contracted with iOCO over an extended period of time. Coupled with that, our [ staff ] also moved across to iOCO. And we just felt that with us closing out 2 very major legacy items last year which were linked to the EOH brand, this would be a great opportunity for us to start a new beginning, which was coupled with the turnaround strategy that we agreed with our Board. So we do know that there is some approvals that need to be done, and we will take it to the AGM. So it's certainly not all done and dusted, but us as an organization are fully behind the change and we look forward to what it can bring us.

Thanks, Marius. Ashona, a question for you. Can you unpack your plan for paying down debt?

Sure. The efficiency and cost cutting program we have in place puts the Group on a sustainable path with cash flows that can be applied to reduce debt. While we have some legacy payments in 2025, we should still see some progress in debt reduction. This will gain momentum in 2026 with higher free cash flow conversion. We don't see any further need to dispose of assets.

Another question for you, Ashona. When will we start paying dividends?

So our first priorities will be to reduce our debt and to invest in growth. However, our reconstituted Board are eager to allocate capital for share buybacks rather than dividends, depending on the level of the share price, but certainly at the current price levels, that would be our preference.

Marius, I think this is a question for you. We see good growth in the International business. Can you elaborate on that a little bit?

I think it's an exciting opportunity that we unlocked some time ago. We're quite fortunate that we had a base that has been part of the Group for a long period of time. Currently, we are based in the U.K., Switzerland and Egypt. The teams there performed exceptionally well in FY '24 and certainly is a part of our ongoing strategy to make sure that we can explore opportunities specifically within the U.K. and the Middle East. I think our opportunities that we look forward to in the Saudi will be driven out of the team that operates within Egypt at the moment. So certainly from our perspective, it currently makes up about 11% of our revenue as a group, which is certainly up on what it was in the prior years. But we're looking forward to some more exponential growth. And I'd like the teams that delivered well in FY '24 to deliver something similar in FY '25. But we're looking forward to unlock those opportunities. [ Esme ], thanks.

Thanks, Marius. Ashona, another question for you. It was around dividends. When will we start paying dividends?

So our first priority is to reduce our debt and to invest in growth. I think I've already answered that question. All good. Yes.

Sorry about that. When will we see a share price happen?

Sure. So it stands to reason that the share price is determined by investors in the market, not by management. I think the focus for us as management is to make sure that we bring as much efficiency into the business as possible and start to aggressively look at growth, both locally and internationally, which will return us to sustained profitability. Hopefully, the market will take notice of this and reward that growth through the share price.

Thanks, Ashona. Question for Marius, please. Between selective acquisition and organic growth, which one presents the greatest shareholder value creation at the moment?

Yes, thanks. Maybe to respond in sort of 2 parts, you would get that question only once you're in a situation that Ashona has already described where we've managed to reduce our debt levels. Certainly from our perspective, in terms of our capital structure, we want to reduce our debt first. I do think that the business restructure that we've done is to unlock organic growth from within the teams. But certainly once our debt levels are at comfort levels that we are comfortable with, what we will then do is invest in acquisitions that will accelerate that growth that we've built off the organic base. So for us, certainly in terms of priorities, at the moment, the priorities are certainly to get the debt paid down. Once we've done that with the free cash flows, will enable us to do an augmentation of the organic growth that is as a result of the business structures that we've created.

Thanks, Marius. Question from Duncan. The previous CEO was pursuing large damages claims against various former executives, including former CEO, Asher Bohbot. Marius, does EOH -- EOH intend to continue pursuing those claims? Can you explain why or why not?

Sure. Thanks, Esme. That's part of the EOH legacy. I do think it's well documented in the public that those matters have gone legal. Certainly it's an ongoing process. It's nothing that we're involved in as a management team at the moment. The justice system will turn according to their timelines. And as a result of EOH being part of that when required, all the documentation that needs to be submitted from our side will be, but we're not actively pursuing anything different to what was communicated before.

Ashona, a question for you. Can you please provide more details and break down the cost cutting numbers as well as the restructuring costs? There are a few questions around that. Do you want to respond to that?

So, from a restructure cost perspective, the detail is quite significant in terms of the various aspects of the restructure costs that is included in the FY '24 numbers.

Thank you. Question for Marius. What is the strategy to mitigate the negative market view that EOH remains unstable due to the numerous and constant restructuring and changing that has happened and continues to happen?