Novus Holdings Limited (NVS) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining, and welcome to this Novus 2022 financial results presentation. This morning, we are joined by Keshree Alwar, our CFO; and of course, Neil Birch, the CEO.

Good morning, everyone.

We're moving to the presentation straight away. This is the agenda for the presentation. We will start as per usual with an executive overview, moving down to some financial details and operational review, some view of the outlook. We'll conclude and then we'll get on to questions section. And as you would have seen on the opening slide, we are pleased encouraged to draft your questions on the site -- and that will be combined together summarized and then we'll attempt to answer to the best of our ability at the end of the presentation. So please feel free to start generating those questions as we go through, and we'll deal with them all together at the end. The period under discussion is still included and we sometimes forget some trade under the COVID-19 restrictions, but we were rather pleased to see a degree of normality coming back as we got into the second half of the period. So that is somewhat pleasing, not that it is an easy situation to go in there so much uncertainty in the world at the moment. But I think that we've shown an element of stability as we've come out of this period. If we take a look at the results summary, revenue certainly stabilized, but there is a meaningful slice of our revenues been lost to structural issues in our industry post-COVID, so that level of just over ZAR 3 billion is a fairly stable value. We don't see a major deterioration or change from that going forward as it's hard to get organic growth in what is a structured and mature business. Increasingly, the operating profit has returned to substantial levels. Headline earnings and of course, earnings per share showed a good recovery from our prior year full COVID period. And our free cash flow has continued to be really strong. The only negative impact on that was that we obviously have an issue of paying tax and we made profit, which impacted our free cash flow. But obviously, Keshree will give you some more details on some of the elements that make up that cash flow. It has been necessary to continue to adjust the group capacity to suit the baseload. And this has been achieved through good operational management. I just hope that there will be some stability going forward as demand does normalize. But the world has become a very unpredictable place. So we remain vigilant and responsive to the changes that get thrown at us. Now moving to the initial parts of the financial review. Project a summary and the key features as we discuss the revenues marginally up. Gross profit is really the area where we are most pleased, which has improved substantially. And that's really driven by a number of factors that you'll see as we go through the presentation, but ideally delivering a better gross profit through higher efficiency levels, better plant utilization and general efficiencies that have crept into the whole business will be driven into the whole business. So you see that big move in gross margin from prior year of '19 up to 24.4%. And then we've seen an overhead reduction in addition to that down to ZAR 551 million versus the prior year of ZAR 560 million. Once again, Keshree will give you details on some of the issues that are included and excluded from some of those numbers. Let us [ stand up ] with an operating profit of ZAR 193 million with an operating margin of 6.4%. Headline earnings per share up to 53.2% and the earnings per share of 30.4%. I'll just hand over to Keshree now to go through one more specific issues related to cash position. Over to you.

Thank you, Neil. And the group closed off the year on a healthy cash balance of ZAR 568 million compared to the prior year of ZAR 443 million, with cash flows from operations, excluding working capital increasing by ZAR 100 million year-on-year as the Print and Packaging segments made a recovery post COVID-19. The net working capital cash -- net working capital outflow of ZAR 11 million occurred mainly due to the strategic decision to acquire paper and polymer raw materials, considering the global raw material shortages in order to offset some of this risk. Whilst the prior year saw a significant reduction in overall working capital to more optimal levels and in line with the group strategy, the external macroeconomic factors influence the decision towards the latter half of the financial year. The sale of Satin surplus print plant and machinery as well as the disposal of the Novus Print [indiscernible] in the tile building, contributed ZAR 110 million positively to the cash flow position. Following the merge of the Novus Print Gauteng facilities in the prior year, the group holds one property as held for sale with a carrying value of ZAR110 million, which it is actively marketing and helps to dispose in the current financial year. The increase in net profit led to the tax, higher tax paid, as Neil mentioned earlier, with free cash flow being impacted by ZAR 50 million, down to ZAR 312 million in the current year. Related party receivables owing from the group's associate in tissue manufacturing was repaid in the period, reducing from ZAR 58 million to ZAR 17 million. This related to the company's initial working capital funding requirements, which is repaid by the associates outside shareholders in proportion to their shareholding during the year. The group produced its external borrowings, which pertain mainly to asset-based financing within ITB, which is repaid in for in the year amounting to ZAR 30 million. The remaining loan repayments relate mainly to capitalized finance lease liabilities within the division. And the group is effectively -- our gearing is limited, and we have no external borrowings on our balance sheet as of the end of March 2022. Our total is ZAR 203 million excess cash was returned to shareholders in the year with a ZAR 0.50 final dividend with a scrip alternative declared for the 2021 financial year, together with an additional special cash dividend of ZAR 0.40 per share in February 2022. This marked the highest dividend in a year since the company's listing in 2015. If we move on to the next slide, we depict the cash flow movements in the waterfall graph, and you can see the positive cash inflow of ZAR 125 million and the several components contributing to it. As noted in the graph, you'll see the CapEx cash outflows of ZAR 25 million, which continues to remain modest and was spent mainly on maintenance of current equipment. The next graph depicts the working capital investment of the group since September 2020. The cyclical nature of the significant printing project leads the significant investment in working capital in the first half of the year, which materially influences the group's cash flow requirements. This is normally just converted after just after half year with the working capital cycle normalizing towards the financial year-end. When reviewing the March 2022 balances, trade and other receivables reduced by ZAR 108 million, with debtor days decreasing from 62 days to 47 days, mainly from improved collections and the stability in the debtors book after COVID-19 costs some financial difficulties to our customer base. As noted earlier, trade and other payables together with inventory increased due to the strategic raw material purchasing in the year. I'll now hand back to Neil.

Thank you, Keshree. Just briefly to pick up on the CapEx point, which Keshree did allude to in some detail, you'll notice a substantial drop in the amount of CapEx in the financial years '21 and '22. While we don't expect that to bounce back substantially. Obviously, some of the CapEx was subdued due to availability from a maintenance point of view of OEM suppliers, people traveling out of Europe to come and to work on our equipments. So that may lift slightly in the future and the expansion CapEx will obviously continue to be limited and will be restricted to specific opportunities where we might get into product diversification for product development. But as it is now, we do project a sustained limited CapEx going forward. If we go to an operational review, and we look, first of all, at the group level and just deal with the same at main points. Printing remains the main contributor to revenue coming in at 78% of our group revenue. We do see Print volumes up approximately 7.1%, which I think was rather pleasing under the circumstances considering how we took a robust turnover wise in 2021. And of course, 2021 also included the Tissue revenue of ZAR 134 million, which we've continued to repeat subsequently being reported on an equity accounting basis. I did mention the gross profit margin being improved, and that's obviously a pleasing element so improved substantially, mainly due to product mix and operating efficiencies coming through. The Packaging revenue margin was up by 2.2%. Due mainly to improvement in ITB's margin, and that was even despite a labels margin decrease, and that really relates to inefficiencies and poor recovery in pricing and certainly prompted the decision that we took to exit a large portion of the Label business from the structural change, and we've now permanently moved away from that. And of course, the other impact was the Tissue's traditionally lower margin, and that has been excluded from the financial year '22 going forward. Operating profit, as I said, though, has increased nicely to ZAR 193 million of the loss of the prior year and operating expenses were reduced by ZAR 19.2 million compared to financial '21. And those do include some one-off moving cost of ZAR 36 million in the '22 financial year. So I think the reality of that increase is substantial, and we're rather pleased that that's a permanent change. So I think the graph mix to reading, specifically the blue line of margin showing a substantial improvement over even financial year 2019. So we'll be doing our best to keep that margin level up and get a good performance out of the revenue that we mentioned [ at that time ]. If we look at Print's specifically without fronting to repeat too much -- but what it's worth noting is the revenue increased by 11.7% against a tinge of 7.1% increase, and that's largely affected by product mix, which means we're getting a better margin relative to amount of paper input. Retail Inserts & Catalogues and the Books & Directories segments improved nicely, while Magazines and Newspapers have continued to decline. And this is a function of the tough economy and it's a function of COVID. During COVID I think people learn to get a lot more information digitally. And that habit won't necessarily revert to pre-COVID habits, but we'll watch that carefully. We know that the Magazine segment was heavily punished number of publishers went out of their business because they couldn't sustain themselves during COVID, and we think it's going to take some time for certain magazines and niche publications to creep back into the market on a level that can sustain those businesses and at a level where the economy is prepared to pay for those items that just seems luxury at the moment. So we talked about the gross profit moving nicely, certainly a great improvement there. And of course, we've [ bolted ] the plant closures in financial year '21, which then flowed into 2022. And relatedly, we stay on our plant structures now. So the increase in revenue substantially improved operating profit and obviously included the benefits of the restructuring commenced in 2021. Operating expenses nicely down. That's absorbing certain one-off costs, which are the way now. And what stated at the bottom there is effectively the cost base was reduced by 10.2% in real terms if we take out the loans. The Packaging segment. I think that showed a nice recovery despite the Labels decline, what's masking these figure somewhat is the fact that we were actually coming out of COVID period, the Labels business was still suffering in this period from alcohol restrictions and practices that stop the sale of alcohol, obviously, reduced the Label uptake. And that, combined with our decision to exit a large portion of that very, very competitive Label business and saw an increase in revenue up to the end of the year. And then obviously, that will differ way permanently going forward. So the main contributor to the stability of this business and the profit of this business comes from ITB and we're very pleased with the fact that ITBs settled in rather nicely. Their margins have improved. They managed to adjust some of their product mix to the extent that they are able to deliver better margin, better product. What's quite interesting from a ITB perspective is they've managed to move away from some of the high volume, less popular plastic products than since they've exited the carry bag market, which is obviously a very, very competitive market and is the high volume plastic at very low margin. So ITB's operating profit increased from 5.9% to 9.6%, a very pleasing move, and they've managed to do that for a well-contained capital base. The Label division operate profit deteriorated somewhat further from minus 6% to minus 8.3%. But once again, that is now, we believe the thing of the past, and we are rather pleased that we will be releasing still further working capital out of the Label investment as we completely wind down that final account. Tissue segment is really just promoting. I'm not going to go into a lot of detail. As you say, we equity accounting now and the revenue that is accounted for there, relates to a building which we still own and the joint venture or the merge venture is a tenant on the building at this point in time. If we just take a look at what's happened to revenue contribution, and I think we can focus as I mentioned on the Magazines and Newspapers that have deteriorated substantially. As you can see now, Magazines and Newspapers combined contribute to pretty close to only 13% of our business, whereas obviously they were up close to 20% previously. And those have shown those big declines. And that's obviously resulted in some of our decisions in terms of our structure and footprint. What's pleasing is that the Retail Inserts & Catalogues, Books & Directories have managed to sustain their volumes and increase their volumes, especially in the Retails Inserts -- and if you can see the percentage of the business that they contributed till now. Publishing in Novus [ Journals ] is a very small segment. We do believe we deserve to have an interest there. Those businesses have been under severe pressure as the whole publishing has been across the whole country and in fact, across the world. But there's been into consolidation. We are seeing some of the publications returning to shelves and returning to [ aeroplanes ] as we respond to a number of [indiscernible] Magazines. And as that starts to happen, we look forward to that growing back into profitable space. To discuss the Labels, trading it down substantially. And then, of course, ITB with the flexible packaging having a nice performance. What's significant on the flexible Packaging is that you see there was a volume decline of 9.1%. But against a top line growth. And what this actually demonstrates and that volume is actually tonnage of plastic converted. We're pleased with our move towards more sustainable products. And what that means is we're able to sell a greater number of -- or greater rand value of product, but it's got less [ interim ]. So we're going to lesser microns, firm materials, lighter materials which obviously from an environmental point of view, is good. And obviously, we are doing as much innovations there to try and improve our packaging footprint aligned with that environment. So I think that's quite a nice point. Tissue, as you can see is down almost nothing because of the mix of the [ tree ] and we're now accounting for it. So I think that's a brief look at the results and the financial impacts. If we move now on to the outlook, and we just go within the 3 main segments. So we now have a streamlined structure of the Print and we think it's fit for purpose. We've got very few surplus assets left there, which I'm rather pleased we've managed to focus that very carefully on specific facilities. We now have a hybrid plant in Johannesburg, which does both coldset and headset. We then still have 2 plants in Cape Town, our flagship Montague Gardens Multi-process site. Dedicated newspaper sites in Paarden Island. And then we do still have the facility in Port Elizabeth, which is a Newspaper facility. During the year, we consolidated the [indiscernible] from 2 sites into 1, and we exited the [ Bloom ] Printing Newspaper site, and that was purely driven by newspaper circulation almost evaporating. We're very pleased that we've retained the Department of Basic Education contract as they retain. We rewon it. It went out to tender at the end of last year and as early as the beginning of the week. We were told that we had -- or last week, we're told that we were re-awarded, so we're really proud of what we can do there. The company is very well geared and structured around that contract because we held it for some time, and we're looking forward to a successful delivery of that project going forward. So we just somewhat negative and concern is the issue of paper availability in general world supply. That has been a very difficult area to navigate. And I think that the management team has done a very good job in securing paper to the extent possible. The largest supplier in the world took a major strike that's out of Europe for 3 months, which impacted supplies on the world-wide basis. There is a knock-on effect on of the Russian and Ukrainian conflict, which is impacting suppliers coming out of Russia. And then, of course, the logistics situation, which is erupted really through COVID, after COVID and it still exists now from some of the impact out of the Chinese shipping practice. Now of course, what's happening in Europe. So we have a severe change to get hold of paper in principle and the paper we are procuring is an exceptionally high prices. And these are increases that are unprecedented. We have not seen something like this in our history and it's making it very difficult to procure paper, and we'd been forced to take very large recovery increases to our customers, and we're doing our best to work with them to smooth those increases to the extent possible, but we know it has a knock-on effect. There's a limited budget that people have to stay on print. We're not yet sure as to how long this difficulty in supply will continue, but we haven't dimensioned [ data basis ] and hence, that we just feel it responsible to say that as much as the group is in a great space, it's well positioned. Our efficiency is in place. We are facing tremendous challenges in procuring adequate paper at good prices, and we're going to see how this last, so that we will we obviously managing to the best of our ability going forward. It could have a short-term impact on our core profitability. But we'll obviously inform the market as we have more information going forward on that. Packaging. As we say, Novus Labels has been scaled right back. We've exited particularly [ onerous ] account, which the level of capital invested in delivering very low profits was unacceptable, and therefore, the decision to exit that is now fully complete. And we're now focusing on the better revenue select products and an element of product diversification coming out of the Label facility. However, it is largely now integrated management point of view into the core print business. ITB's performance as we said has been good. We see no reason why that won't say stable. They have a reasonable demand, notwithstanding the economic pressures and pricing pressures amongst the consumers. We found that ITB found a good spot, good production, reliable, good quality, and they're running off a well-managed capital base. Tissue, we have around 49%, as we say, our merged entity with outside parties, and that business has obviously been going through its own difficulties relating to COVID. And typically, at the moment, is experiencing some impact from the [ case of floods ]. So it's a water intense business, and the current water restrictions that are playing out in [indiscernible] are not helping this business. So we're hoping to navigate that with local authorities to extend that will help sustain supply -- of water. But nonetheless, we are pleased with our partnership, and we look forward to this business stabilizing and contributing positively going forward. If we go to the group outlook, we put this in a slightly different format. We're coming to an end of realizing of surplus assets. So we've managed to sell of surplus equipment. We've closed our excess plants. We have one property held for sale at this particular moment, and we're at a plant stage of disposing of that. We will continue to adjust our efficiencies going forward. And I think we've learned to be quite agile and to handle what comes along to adjust our capacity as it goes. So there's the right mentality in our business going forward in that. We flattened the whole structure of the group. We have to face the fact that Novus as a group is a much smaller business, having had the permanent loss of top line, and we have lost people in the process, and obviously, we've structured appropriately. So we have a much fatter structure, a small head office, a very small head office, the most nonexistent. And I think that's appropriate to see the size of the business. And I think we'll see that going forward and continue to manage the business structure in a proportional manner. We'll obviously go forward with the DBE contract. We're pleased about that the tender award is for 3 years with the prospect of a 2-year extension to that. And we'll be doing our best to pick up on that. What is quite important that the award is that it has come rather late in the year. Normally, by this stage in the year, we would have started production. And obviously, with the award only coming last week, we will be wrapping up very, very quickly. What it will do is it will obviously change the dynamic of our normal cash flow profile. As Keshree showed you in the normal process, we do have a peaking in a collection and a peaking in collection by the year-end. We are still reasonably comfortable that we will collect this year's contract before the financial year is out, but the periods are likely to run slightly delayed. And then we look forward to a much more setting than the third year of the contract as we get under our belt and have the award to rely on and procure the necessary capacity and material going forward. Then of course, we talk about our deployment of capital. Given our stated strategy of returning surplus funds to shareholders, there may be a degree of surprise relating to the SENS announcement of Tuesday. The Board is of the opinion that it is still -- has the responsibility to identify good opportunities for deployment of capital. And given the renewed focus in the business and the decline in the core, it is backing the company to execute on a very attractive opportunity to enhance returns in the longer term, and we look forward to sharing more about the details of this at the appropriate time. So as much as we are pleased with the strong dividend that we returned basically in the calendar -- last calendar year. And well, people see sitting on good cash resource. We will continue to look at what is the best deployment of that capital and will keep shareholders align to what our plans are. If I conclude, I can really say that under the circumstances management is very satisfied with these results. It has been a difficult process adjusting the business to a continuity change in [indiscernible]. I must thank operational management in Print and Packaging for their efficiencies and their effectiveness and their commitment to the job. I believe that we have positioned Novus to be more responsive to change, which has certainly been appropriate in the past 24 months at least. The business is better structured to operate in selected focus areas. We're entering a very interesting phase as we once again look a bit further down the road in front rather than just behind us and the sides of us and for opportunities and not only the obstacles. I think it's appropriate, we will pause now for questions. So those of you who have not yet posted questions, you have an opportunity now to please submit those. And if we'll just take a short break now while we understand those questions, and we will revert within a few minutes to give the best structure to answer those. Thanks. [Break]

Everybody. I'm back again. We have a number of questions to address. Not a long number, but let's have a look and see.

The first question says, how long can Retail Inserts sustain if used paper volumes keep falling? I think -- and there's a large percentage of this printing distributor outside of newspapers. I think what we're finding is that the Inserts and the Advertising is actually propping up newspaper distribution to a large degree. It's a perfect carrier. As much as people are not necessarily reading it or buying as many subscriptions for the news. It is a way for the retailers to reach the broad market, and we found that, that is sustained. So it's a series of newspapers. It's local newspapers, it's national newspapers. And then there's a fair amount of in-store distribution as pickups. And then, of course, there's also the knock and drop market where things are taking on and dropped into personal data boxes. This is something which is a structure within the South African market where one doesn't easily move away from this, and it has been something with [ salvation. ] A number of the retailers have also experimented digital advertising. And the general, I'd say, sort of loose feedback is it's not that successful. So they are moving back or retaining their presence on the printed advertising route. And that's obviously playing to our strengths, which we're quite pleased with. So it's cost effective and seems to have good penetration. We move on to the next question. It says that could you please clarify why Tissue Group to be a poor area of investment. And then similarly, for Labels, if this is due to excess competition is the same margin pressure likely to come to packaging? Now there's a couple of issues, when I look at tissue to start with. I think the unfortunate thing is that it was principally good direction to go in, considering that it's a downstream conversion of said amount of our waste material. So the byproduct is waste paper. We pulp up the waste paper, mix it with some other fresh pulp, and we generate tissue. So it was a good fundamental. However, I'm not convinced and I can blame some predecessors, which I don't specifically wish to do, but I wasn't around at the time, I think that the actual business was maybe not as strong as we thought it was. I think we overcapitalized, we followed the investment with subsequent capacity improvement. And it's a very difficult and somewhat informal market. So we're a large professional organization. We have to meet a lot of safety standards and normal professional etiquette. And surprise to say, there are some players in the institution not quite as professional as we'd like to see. So it's a very difficult business. It's quite cyclical, and it's really not our core expertise. We really need to be invested in that business and to be responsible on a day-to-day basis. And we don't honestly have the core competence within Novus to run the business of that nature. So I think the unfortunate thing was that maybe the business we bought was not as strong as we thought it was. And then secondly, we followed it with quite a lot of extra capital, which there wasn't a proper justification for it. Label is slightly different. We went into Labels and we pursued a particular market. Now we're not concerned about pure competition per se, but you can get drawn into chasing pure volumes. And if we get into the pure volume business, the ultimate capital investment from our working capital in terms of raw materials as well as debtors and certain customers have an expectation that the debtor terms are quite exceptionally long. It just doesn't make for good commercial trading. So effectively, we chased volume, I believe. We chased it at a sacrifice of margin and when we stood back from [indiscernible], we thought we to probably do more with the cash that was tied up in that aspect of the business. We know that Packaging itself is competitive. We think we have a competitive business, well structured, and we're able to go toe-to-toe, we believe with the most competitive competitors that we have there, and we'll still make a good product and make a responsible profit. So we're not uncomfortable about packaging. We accepted as already been competitive, and we're able to take lightweight in that space with the team, wealth management we've got and the equipment fleet that we've put in place so far. I then move on to 2 questions, which are very similar. It says what is the cash-on-cash payback period we target on potential acquisitions and suggested no as a cost of equity close to 25% with equities used to fund the proposed acquisition. The acquisition is difficult to envision that the yield generated by the new asset will substantially exceed 25% cost. And then follow up to that is a suggestion that if we -- what kind of acquisition could we go into, which should be better than a share buyback at a huge discount to NAV? Basically, the statement that we have an equity cost of 25% it's probably a little higher. I don't know it is highest 25%, but I will short-circuit that answer by saying that the thing that we're looking at the moment has a better rate than 25% in return. So we would only get into something like I said that was really aggressive and felt that there was a strong upside to the business. I hope that I answered that sufficiently. I'm quite happy to take the engagement with, with the 2 gentlemen to put those 2 questions for off-line basis to deal with it more specifically. Then I have the last question, it says, how do you trade off acquisitions to grow business versus, for example, in packaging, focusing on printing, maximize cash generation, [indiscernible]. I think what we've got to be careful as a balance is we can be particularly good at printing and we can focus on it. But it is a business which is structurally in decline. And once we don't maintain an element of critical mess, otherwise, you cease to have the benefit of scale. And I think that there is an opportunity to pick businesses in which we have an influence. We have some expertise and some relationship, and we can find something which will rather linked to diversification and therefore, keep the core in place and [ treatment ] to growth. But what we are saying is that we're going to focus on things which we believe we can have a proper influencing and do well. And that's why we believe we're good at print. We've got good capabilities, good assets as much as they -- we may not be trading at NAV because of the value of those assets, we'll be looking to close that gap and realize that the returns are more appropriate to the NAV that we've got going forward. And I think if we're able to find very selective expansion opportunities, we'll pursue with absolute vigor and with great caution in respect to the fact that we may not have done it until that well in the past. So I would hope that I've answered those questions. As I say, we encourage you to engage us further if you'd like to send further questions to our investor email address, required to engage on a one-on-one basis to the extent that we can at this particular point. And obviously, in relation to the cautionary, we'll be able to share more information as that in fact becomes available and appropriate to share with shareholders. So I think that all that remains for me is to thank you once again for your time and attendance. We hope that you found today's presentation informative. So we thank you for that and wish you a good day for that. Thanks for joining us.