Novus Holdings Limited (NVS) Earnings Call Transcript & Summary

Thank you, Keshree. I'll just now move on to a risk of a little bit of repetition and some operational impacts of what we've been through. We look at the group level, which obviously consists now mainly of Print and Packaging. The Print revenue contributed a significant portion of 78% to 79% to revenue, which is up on the prior year slightly. And it was on the back of an overall volume increase of around 9% in tonnage terms. I think what is more meaningful is that of that fairly static revenue line, we managed to improve the gross profit margin and therefore, deliver a better operating profit. So as stated to a degree by Keshree, it was due to product mix, improved operating efficiencies and obviously, exclusion of lower-margin tissue revenue. Packaging revenue contributed at a lower margin with a 0.9% decrease on prior year, but that was really an impact of the inefficiencies in the Labels business because ITB actually did quite a good job and improved their operating margin, which was obviously offset by the Labels decline. Operating profit increased to ZAR 90 million, and that was mainly due to an improved quality of revenue as opposed to quantum of revenue. And obviously, the severe restructuring exercises, which we went through with mainly in the Print division. And as we've stated, Tissue was equity accounted from the 1st of October 2020. So I think the overall trends that are shown in that picture, if we can sustain that in terms of recovering margin and then gradually growing back our revenue line, I think that does bode well. A bit more specifically at Print a similar trend, obviously, because Print win such a major influence on the business. We show that increase of 9.1% across general categories, and we'll come little later to how that was influenced across the various categories because it wasn't uniform. There was obviously the restructuring improved the margin in multiple areas. One is that it took away costs and those are permanent costs of , but also the depreciation will came down slightly in relation to some asset impairments. So the improved revenue dropped to the bottom line, which shows an operating profit as Keshree mentioned, the doubtful debts were approached differently. Last year, there were some genuine bad debts, which we obviously took as a result of COVID and the difficultly some of our customers face. And then obviously, there was also a conservative view as imposed by basically taking the right and prudent process to other potential risks that might have sat as a knock-on effect from COVID. Not all of those were affected but obviously, it made a big change when we came to this year that we obviously didn't have to impair our debts to that extent. And of course, operating expense improved as it related to the restructure. So in that restructure, obviously a degree of reducing people and obviously reducing a number of plants. Packaging is a little more complex to read because I'll talk about the impact -- negative impact of Labels, which unfortunately tarnishes the good performance of ITB. So Labels revenue strength enough increased of an exceptionally low base. So if we consider that in the prior period, we were in hard lockdown and there was a large portion of that period, which was under alcohol bands. And the work that we do, the big piece of the work we do in Labels is actually beer bottle labels. So that was severely impacted. Now when the revenues bounce back, it literally bounced and it came in stages. So we weren't without alcohol bans in the period under review. But obviously, it was to a lesser extent. So our revenue seemed to recover, but the quality of the revenue was very, very poor. And this came together with this business being very, very tight margins. There were disruptions to raw material suppliers. And the result was a very, very inefficient production of increased revenue. So in fact, it became a case that the more revenue we achieved, the less profit we made, which is a very unfortunate formula to be followed. And that obviously led to the decision, which I'll maybe discuss in greater detail to, in fact, curtail a large piece of the Labels business to, in fact, get it under control and stop chasing this high turnover, high efficiency model. Over the years, we have pursued a higher-volume model, and I think we are well poised to achieve it. But in a very, very disruptive market, I think it exposed some of the weaknesses and that informed a decision to exit a very, very large contract. ITB, on the other hand, had less impact in the prior period as much as COVID did impact it from a period of trading, and there was a degree of subdued trading. It did largely trade reasonably well in the prior year even with COVID. And this year, it managed to improve slightly by 7.2% on top of it. Superimposed on the general pressure on revenue lines, there has also been an element of product mix change at ITB. And I'm very pleased to say that we've exited a few of, again, lower margin products and focused it more on the better margin products. So ITB achieved a gross profit margin of 18.5%, which is nicely up on the 14.9% for the prior year. And as I mentioned, the Labels margin dropped dramatically from positive 6.5% to minus 7.3%. So the Labels division achieved very low margins, which offset the gains that we made at ITB. Operating profit for the segment did manage to increase from 1% to 4.7%. Now due to the performance of ITB offsetting the label's negative performance. I think this is an interesting picture to look at in relation to our revenue contribution. And just take note of the fact that there are 2 different metrics here. One is relation to the share of the group revenue, and then the final column relates to an actual volume growth as opposed to share growth. But nevertheless, what can be seen from here, is that the magazines has actually got a lower percentage of group revenue, but it has shown a substantial decline. So it has dropped by 21.8%, which is significant in volume terms but it was dropped quite well by newspapers and the pickup in retail in certain catalogs. So together with the economy getting going again and people getting back to work and the retailer is starting to get going again, we did see a nice growth in our retail business. So you can see 87.6%, which lifted nicely there. So the 2 categories of newspapers and retail and catalog inserts moved quite nicely. Books and Directories, some of that is timing related, but that was obviously down, and then we look at publishing. Publishing as you can see, is a very, very small piece of the group's business. It's something of an experimental area. We do feel we want to understand the publishing end of our business as opposed to the pure production output, and therefore, we've stayed with that. But the publishing sector was very hard. If you look at magazines being down, then obviously, it would go to say that the publishing will also be down. And just for a sense of some of the things you can relate to when you're responsible for publishing a large number of in-flight magazines, you can imagine those haven't done too well during the last period, let's say, little domestic and especially international travel. We will stay with that, and we do see some green shoots coming through on the publishing side. And so we'll stay with that venture and see if we can't lift that and make that more significant. And I've spoken more at large about the Packaging segment. Obviously, Tissue, we don't do full reduction, we're almost doing nothing in the tissue aspect and certainly we'll be accounting on this basis going forward. Labels, as you can see, had a decent revenue that was bouncing back off the COVID lockdowns, but we didn't turn that into good profit. And then the flexible packaging in ITB -- although, in volume terms, looks like they're down, the revenue is up, which suggests a far better margin and a better quality of revenue. So we're quite pleased with that result. If we move to segmental outlook in a bit more focus and again, maybe to repetition. We've had an ongoing drive of cost reductions through this well-played term of rightsizing initiatives across the Print operation. And I think these are permanent changes and there are structural changes and are in response to step changes in demand. So we've continued to try and keep efficient good critical mass in specific operations. And to the extent where critical mass cannot be sustained, we've chosen to close those businesses. So since we've spoken the Bloemfontein operation has been closed, and one of our Johannesburg plants, Linbro Park has also been closed and elements of that will be consolidated in our side. The post recovery COVID-19 recovery show that this is a better half and they look to stabilize. But they're not by any means shooting the lights up, but I think the quality of the revenue is good, and we are taking a very conservative view as that goes back. We've obviously got an ability to manage and throttle our capacity still further, either to increase capacity or to further do little decline if required. So the response to market effect is very, very dynamic and very spontaneous. The rand has been quite volatile in the period, and we do have a rand hedging policy which I think has largely helped us, in fact, with the strengthening rand, it's not that beneficial. But certainly, we free weigh the benefits against the volatility and an increasing rand against maybe an occasional expanding rand but we are still happy that our policies are well structured. We actually, during this period as much as we might have shown an improved operating profit. We were faced by some already pulp and paper shortages, and that would have been an impact of physical availability and then shipping constraints. And of course, the rand volatility has just made it quite hard to determine where the prices are going, especially in the environment where customers might look for a fixed price outlook for at least the limited period. We are in the process of completing the last year of that current very profitable DBE contract, and we do anticipate submitting a new tender, which we believe to We move across to Packaging. So what we've done is we've taken a view on removing a very large portion of the Labels business, a very high volume, low margin capital-intensive business. So we are busy winding that down, and by the end of the calendar year, we will effectively be after that. And what that will do is we will release a certain amount of working capital and be focusing on the type of product we go into and we'll be avoiding the pure low margin, high volume, but rather focusing on some better value innovative products. So we look forward to that being almost a new business, growing back out of the ashes so to speak. And I think that management is heavily engaged already in some innovative ideas. ITB's performance is expected to continue to improve. I think management has become very focused during this past difficult 18 months to 2 years. And therefore, well tuned to able to take advantage of opportunities as they present. We will always remain dependent on the state of the economy for both demand and of course, fluctuations in input costs. But I think we can trust that the IT management is well positioned, and I think they've done a good job for us in the period under review. We will continue that across the Labels and the IT business to look for possibilities to expand our product range using innovation, but without a major diversification in terms of CapEx or buying into new technologies. Take a look at the group outlook and a few of the macro effects in those Keshree spoke about. I think we were quite fortunate in terms of direct impact of the July riots. They -- we did take a few plant closures for a period as a precautionary measure. The demand that might have been or the production that may have been lost during those close downs was recovered, I think subsequently. So in terms of pure volume and revenue throughput impact it wasn't there. However, we all know that the South African economy has been permanently dented and it's going to take some time for that to recover. So we do have some markets which are impacted by that, but quite thankfully, not to a major extent. What did happen to us was that the issues of transport, the disruptions to supply chains. That was quite severe for our Print business more than anything else, where we struggle to be hold of paper, we had exceptional costs related to moving materials around the country to metric for supply shortages remain certain circumstances to use suboptimal grades of paper or suboptimal sizes. And that was quite a challenge. I think it was quite well managed. However, it did have an impact on bottom line profitability. There remains to be a bottleneck on worldwide logistics. So while we had domestic issues forcing logistical issues, that's now gone on to a bit more of an international scope. And that's obviously been fit quite heavily by the general commodities move on a worldwide basis as the economies throughout the world are bouncing back. In response to COVID, we found that some of our paper producers internationally actually cut capacity, and that may not be coming back in a hurry. So with the increased demand, reduced capacity, we're rather concerned about the future pricing on pulp until it settles again. And that could be with us for maybe another 12 months. And it's a drama, which is actually unfolding for us on a day-to-day basis, and we continue to watch and respond appropriately. Load shedding has reared its head again in quite a large form just recently. And whilst we, as a group, are very well equipped with alternative standby generating capacity. When we do use that, it comes at a great expense. So the cost of diesel to generate electricity is very high. So while it does allow us to meet our customer demands and meet our on-time commitments, it doesn't help us from a customer point of view. And we are certainly hopeful that there's no instability and predictability that creeps into our electricity supply in the near future. ForEx, as I've said before, remains a challenge, and we continue to view our ForEx smoothing program, and we will be modifying that policy as we acquire just to make sure we have certainty in these parts, where there's so much uncertainty on what's happening with emerging markets, the strength of the currencies, what might happen with inflation internationally. So it's a very dynamic situation and something which does receive a priority of attention. So from an outlook and what we carry on doing is we're going to continue to optimize our capital allocation. We do believe we can further improve our cash position and we can improve our return to shareholders, both in real terms and in terms of what our earnings are as a return on the invested capital and the remaining capital. We have got an initiative to focus more heavily on the African market, not with once-off project so much, but more on sustainable ongoing business, and we are sensing a degree of success in that area. Transformation remains a key objective, and I'm pleased to advise that Novus has retained its Level 2 B-BBEE status, and we're both proud of that and committed to sustaining it going forward. So certainly, we have challenging market conditions, and it requires a continued risk assessment, and we are very on a very short time scale of reviewing every single decision we make. We are very ready to make changes as they required, and I think we've become very changed to the market and we'll continue looking forward to see what might happen and make sure we respond to any changes in good time. Now just as a final point, shareholders will be aware from the sense that there's been a mandatory share offer being triggered. We are very confident that we will have the detailed circular out with all the shareholders before the end of this month, and we'll obviously give people for details of what to expect. So in conclusion, Novus has been navigating some rather troughy waters over the past few years. And I'm very pleased that despite these challenges, we continue with a strong balance sheet, we remain cash generative and responsive to market conditions. We can be proud of an agile and committed management team that continues to respond timely to the dynamic market in which we operate. It is, however, regrettable that some of the strategic initiatives do come an expensive impact on the number of livelihoods, but these are unavoidable consequences. The Board remains committed to the stated strategy of delivering earnings appropriate to capital employed and returning service capital directed to shareholders. As the environment now stabilizes further, the commitment to this objective will become more apparent. I would like to recognize the support of my board and management teams over an extended challenging period. And also to thank shareholders for their continued interest in Novus. We'll now pause to deal with questions that might have been posed or that you still wish to post, and we will then digest those and come back to you with some form of answer to the extent that we can. Please just bear with us as we have those questions related to myself, and I'll begin with that shortly.

As a matter of facts, I have 2 potential questions, which I'd like to respond to. And the first one asks what drove the newspaper volumes of 37%? Now obviously, we need to see that in context, that's an increase of a very, very poor base. So during COVID-19, the newspapers, whilst they continued, they became very, very thin. Advertising was sparse and the number of pages in each newspaper, as you will have seen was very, very little. What did start to come back was editorial, but what in this country is seen as a very important aspect is that the newspaper is a strong medium for carrying advertising. So now the mix in South Africa is that newspapers have to or use, not have to be used, but they are used as an essential element of conveying advertising to the market. And as the retailers pick up and the retail activity picked up, there's a need to start putting those into the newspapers. So that is probably the single biggest reason for it bouncing back. And obviously, the other reason is that it came off a very, very, very low base. The second question relates to the size of the DBE contract. It's not something which I really would like to -- we don't generally like to divulge the full extent of such a project publicly, it's obviously fairly confidential. But needless to say, it is meaningful. It does impact on a certain amount of plant utilization, people utilization and obviously drops to the bottom line. Clearly, as a mature thinking business, we will have considered the prospects and the impacts of not being able to renew it whilst we remain fairly confident of our competencies and our proven track record and would be pursuing the renewal of it. In the event of not being renewed we'll obviously have to take very severe corrective action and would structure the business accordingly. The business in Novus remains a profitable business without the DBE but obviously on a lower scale. And that's just functionally where it's come from. It's been a very, very good contract, I think, in terms of us as enjoying the contract. And in terms of the DBE enjoying our production and our reliability and our good quality and on-time delivery. So it would be unfortunate if we were not reawarded the contract, but it's a competitive situation, and we'll be certainly doing our best to retain it. And therefore, some unusual reason we don't, we'll be responding accordingly with appropriate action. I trusted that's an adequate answer to the extent that I can, I have another question which has come through. I can just digest it before I speak off to that. Right. The next question was a batch of 3 questions. One related to the Linbro Park facility. Linbro Park facility is on the market. The exit from there is not quite as straightforward as it's not yet standing empty. We have a phased exit approach in which we are winding down production. And obviously, only when we physically out, can we actually sell it, but that doesn't mean we haven't started approaching the market. The price that was being put out there was just over ZAR 160 million. That is not seen as an attractive price. We have seen obviously some factors in the local market, which has made investors nervous. So I don't believe that we will get that level of pricing for it, and we'll obviously start pursuing the sale of an asset more aggressively to certainly coincide with our exit on that sum by the end of January next year. So obviously, we'll watch that space and see how successful we are in that particular The next question. I'd like to possibly hand that to Keshree just to confirm the details of how we deal with that ZAR 38 million lease release as to whether it was included in the headlines or not. So Keshree, if you wouldn't mind, please just responding to that.

Yes, Neil, it was included in headlining.

Thanks very much. And then the final question which was asked was where do we stand with our dividend policy. What I can tell you is our dividend policy is currently under review. We don't believe the typical policy is appropriate any longer. We used to have a policy which was related to a multiple of headline earnings. We don't believe that, that is appropriate, especially in the mode that we're in, where we are actively looking to release capital, which is not being well utilized. And I think we're having a degree of success in finding that, as you've seen with disposal of some big assets. And the scaling down of some of the businesses and the release of working capital, which translates into substantial sums of cash, and we're obviously be looking at a policy which allows us to return that to shareholders a lot quicker than a normal policy of dividends would have done. But obviously, as soon as we're able to divulge what that dividend policy is, we will do so. But suffice to say, it will be different from the history, and we do believe it will be a lot more generous. I have some new questions coming in dribs and drabs. Just forgive me while I just digest this. Okay. The first question relates to and it suggests that the DBE contracts straddled year-end. Just from a correctness point view it didn't straddle the year-end and it straddled the interim period. And as Keshree pointed out, that the very high number in the debtors is what will actually move over into the second half, and at the time of us already putting this presentation together that cash has already flowed in. So it was very much a short-term delay and that portion of setting net working capital as an exceptional debtor level would have flowed in directly. So the excess debtors that Keshree alluded to has flowed directly and would have appeared already in October, the October figures. If we go on to the next question was the anticipated working capital release from the Labels restructure. I can give you a sense of that, that should be in the vicinity of about ZAR 60 million. And that's a piece that's very loose off the top of [ Neil Birch's "head." ] And then there's a question, when does the requirement of the business to partly fund the Tissue business working capital requirement end. The relationship of our shareholding is on the basis that we only support working capital in the Tissue business on a ratio to our shareholding. The partners have options to procure the balance of the shareholding from us. And to the extent that they dilute us, they will also dilute our requirement to provide working capital. So basically, that working capital will be on a diminishing basis going forward [ that eventually reference] to nothing. But it's driven entirely by our share of the equity and we support the working capital in the same share. I don't believe there are any other questions. If for some reason, there are questions which come to mind. Please feel free to send them through to [indiscernible] that seems to be the end of the questions as they've come through formally. If for some reason, you come across some other ideas or queries that you may have, please feel free to contact our investor department who will happily deal with giving you some answers or directing to get to the right sort of an answer. So I think that all that remains is for me to thank everyone for their attendance and interest, and I trust that we've managed to answer your questions to the extent that we are enable. And that I hope that what we presented to you did give you a bit of more information as to where you know is that and what we are facing and maybe how we're changing those challenges ourselves and how we're dealing with them. So thank you once again for your attendance, and now wish you a good rest of the day and a good weekend. Thank you.