Novus Holdings Limited (NVS) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to this Novus interim results presentation for the 2023 year. We're talking today from our own within our studios in Johannesburg. And today, I'm joined by our CFO, Keshree Alwar.

Good morning, everybody. Thank you for joining us today.

We'll start, as per usual, with the agenda, which goes through an executive overview. We will move on to financial review, operational review, focusing on something of an outlook. We'll conclude, and then we can move on to some questions. So relatively short and compact. Firstly, on the executive overview, you can see that the revenue was ZAR 1.5 billion roughly, down slightly from the prior year. Operating profit was unfortunately down substantially. We only managed ZAR 2 million to ZAR 3 million operating profit compared to the prior year's ZAR 19 million. And then obviously headline followed on sort of that same trend. As was discussed at the time of the dividend announcement, we had the opportunity to take advantage of a very good position, and we chose to pass the dividend, and therefore, preserve that cash to continue to the payment for that particular acquisition. What I'll do now is I'll just hand straight over to Keshree to provide any more detail on the financial review.

Thank you, Neil. Let's talk through some of the key income statement pages and our overall financial performance with period compared to the prior comparative period. Revenue has declined by 3%, mainly as a result of the refined Novus Labels business, which is servicing a smaller customer base in the period following the restructure in the prior financial year. Competitive pricing and market declines contributed to the remaining reduction in Print segment. The group has already managed to maintain a loyal customer -- loyal and responsive customer base throughout the challenging [indiscernible]. Gross profit was negatively impacted by the rise in material costs directly into excessively higher paper pricing together with energy and logistical surcharges experienced later that part of prior financial year. Gross profit amounted to ZAR 250 million with gross margin of 16.9% compared to $366 million and 24% with respect to the prior period. The late start-up of patent of basic education contract was awarded June 2022, resulted in production commencing in the second quarter of the financial year as opposed to directly commencing at the beginning of the financial year. This has also led to a shift in the timing of execution of this revenue. Prior year included a higher proportion of revenue recognized mainly in the same period -- recognized in the same period. The group involved in several restructures in the last few years, affecting the Print segment which we just seen, operating into substantially reduced overhead cost base. Last year's overhead costs reduced by 17.7% in the same period amounting to ZAR 59 million with a further reduction of 17.8% in this year. One-off costs were included in the period for professional legal and other transactional costs related to the anticipated Pearson acquisition, together with the further restructuring costs in the Packaging segment. A review of the adequacy of the expected credit loss allowance led to an increase of specific allowance by ZAR 6.2 million due to the heightened credit risk of the customer who continue to face financial difficulties. The overall [indiscernible] remained recoverable, general allowance remain in line with that of the past year. Operating profit for the period amounted to ZAR 23 million compared to ZAR 93 million in the prior period. Consequently, headline earnings per share amounted to ZAR 0.029 and earnings per share at ZAR 0.26 per share. The group's positive uptake of the scrip dividend issued to shareholders in September last year, we delineate shares on a subsidy of the Print and the exercise of employee share incentive rewards contributed to an increase in the weighted-average number of shares from 291 million shares in September 2021 to 320 million shares in September 2022. If we move on to the cash flow and analysis. Cash generated from operations, excluding working capital was impacted by the before the period margin ZAR 69 million compared to ZAR 133 million. Net working capital investment has increased by ZAR 380 million due to the increased investment in paper stock from the combination of [indiscernible] stock in hand, increased paper pricing and the timing of production of [indiscernible]. Trade and other receivables were also impacted by the shift in timing. Capital expenditure has remained minimal with ZAR 16 million spent in year remaining Print asset belt led to purpose of $6 million annual period. Taxation, reduced corporate income tax rate of 27% was applicable in the period with taxation period of ZAR 1,100 million. Interest was earned on the group's healthy cash balance maintained at the majority of the period, amounting to ZAR 8.3 million. Asset-backed borrowing in ITB was fully settled in the 2022 financial year with a limited external variance in the balance sheet improvement currently only related to IFRS 16 lease liability recognized for property and machinery leases [indiscernible]. The gearing ratio at the end of September remains low at 1.4%. However, there will be changes in the [indiscernible] the group to fund the Pearson SA acquisition as disclosed in the circular shareholders distributed in October. The group has partially financed this acquisition with return debt facility amounted to ZAR 500 million with the remaining portion to be funded from excess cash reserves. This will introduce some gearing in the form of security from the funding. No dividends were declared -- or paid in the period due to the decision to utilize in excess cash to fund the acquisition, a dividend of ZAR 75 million was paid in the prior period. Despite the significant utilization of cash in operations, the group closed with ZAR 236 million in September. Our focus remains on continually negotiating extended payment terms with suppliers and timely recovery [indiscernible]. While closing the cash position with ZAR 236 million due to the investment in working capital in the seasonality business, working capital facilities have been raised for cumulative period post September to allow for this increased funding requirements. This will see the utilization of [indiscernible] facility from October, which is expected to normalize by year end. We move to group cash flow movements. The next slide, the base geographical representation relating to cash flow using the waterfall graph since March 2022 where we close out the balance of ZAR 568 million with the most significant item pertaining to the investment in working capital at ZAR 380 million period. If we move on to the final cash flow slide, which depicts the position at September and March for the last 2 financial years, one can see that it is typically higher in September due to the seasonality of the business and normalizing by the year end. Capital expenditure for the past few years continues to remain focused on servicing existing parts of machinery with some expansion in CapEx for the period. I'll now hand back to Neil to take you through operational review.

Thanks, Keshree. Obviously, we are laboring a point in terms of the cost of paper costs, the rising input costs, specifically relating to paper and what's happened around the world. And I'd say ad nauseam [indiscernible], but it is something of significant that we've not really experienced in the past. We take a quick look at the group overview, you can see that revenue decreased as discussed before, marginally by 3%. The restructured Novus Labels division, revenue obviously came quite -- take down quite substantially, but that was a conscious decision, which we're very pleased we took. We've really exited some very low-margin business there and that is demonstrated, as you said, with the latest performance of Labels of that smaller base. But of course, there was a reasonable [indiscernible] working capital at the same time. If we take a look at the gross margin growth. Gross profit margin weakened quite dramatically, and that was due to the input costs more than anything else. But on the other side, the Packaging revenue contributed at a higher margin with a 3.6 percentage point increase on the prior year. So we're rather pleased with the consolidation in the Packaging business. But we still have a certain amount of pressure in the Packaging division, which does a [indiscernible] is quite dependent on polos -- the polymer price and the oil price would have impacted input costs, but I think that was significantly managed. So operating profit for the group decreased to the ZAR 23 million mark. As we said, it was ZAR 19 million prior year. Overhead costs were down, which we're very pleased about. So we responded to reduce costs to the extent that we could. And then there were, of course, as we mentioned, some one-off transactional costs worth ZAR 8.4 million, which we recorded in the period, but do relate to the Pearson acquisition. And obviously, an acquisition of that sort in nature typically have substantial and professional fees attached. What is of great significance is load shedding. And I think we're all experiencing the impact of load shedding in our personal lives and in our business lives, and we have a very direct cost of ZAR 12 million in the 6-month period. Just to give the significance of that. Loading shedding picked up substantially in the month of September, we had a diesel bill of ZAR 5 million in the month alone. So it has a large impact apart from the indirect knock-on effect that it has operational efficiencies and new customer service levels. It's a significant issue, which we're learning to manage [indiscernible] as we go forward basis, but it's a real impediment to success. If we go more specifically to the Print segment, where most of the pain was taken. You will find that the revenue decrease, which was obviously more substantial at 14.5% across all product categories, which was significant. And of course, that's a substantial drop in gross margins, so you can see the drop from being in the 20s to going down to just about just under 17%, substantial drop driven in time by the paper cost increases. So while we did do our best to reduce operating expenses substantially, it was not sufficient offset such a substantial margin reduction. And of course, we talked about the professional fees as we did before, but we also, in this particular division, took some provisions for doubtful debts just on a careful basis as opposed to having particular risks, but obviously driven behind normal risk in the mitigation so it's prudent to take those kind of provisions. If we move on to the Packaging segment, where things are a lot more pleasant is that we basically had an increase in the margin across the division. And that was largely the margin improvement was in the Labels division, which obviously had price back in as a very low margin, large project. And ITB, while the margin might have deteriorated slightly, in rand terms [indiscernible] and obviously with the very high input cost given the onus I referred to, that would have impacted it but in rand terms it was substantial. And managing that, there was also a good expense management. So that really managed to deliver decent operating profit on the ITB business and obviously combined with the [indiscernible] cessation of losses on the Labels business, [indiscernible] profit in the period, ZAR 29 million and that was mainly due to ITB's improved profitability. Overall good margin management and good expense management. So we're really satisfied with where the Packaging division is going. It seems to settle into the group rather well. The entire team -- theme within the business is in line with Novus and we're basically doing very pleasing results. If we just move on to where the revenue contribution comes from. It basically demonstrates a serious deterioration in Print area, which we anticipate. So Magazines is down 30%, almost in terms of contribution to profit or to revenue. Newspapers down, down to only 9% of the total group, 28% down on its total. Retail inserts and catalogs, while still a meaningful share of group revenue, it also took a reduction in terms of its volume down by maybe 12%. Books and directories continues to be a big base in our business. It also saw a reduction across the general contributor. Publishing, which is still a very, very small and less significant piece of our business, has struggled, and it's been a difficult area coming out of COVID. We know that a lot of magazine titles have been suppressed and some have disappeared. We're managing to claw our way back and we spoke to see some green shoots coming through in that side of the business. And although it's a small percentage of our revenue reduced scope, we should be turning that into a positive contribution. We're getting to the Labels and Packaging as we spoke about a nice improvement. As you can see that the flexible packaging has now picked up to be a more significant piece of group revenue, which is pleasing and obviously, being at a better profit, it's more pleasing as well. Tissue relatively insignificant because we obviously side the revenue in anymore because we are a 49% shareholder in the business. We find that, that's stabilizing quite nicely and we're looking forward to that going forward. And ultimately, whether we remain in that business as a shareholder or not, will be determined by its recovering the appetite of our part to take full ownership of the business. If we move on to the outlook, there's not a massive change from year to year what's really happened. The real focus on the outlook is that the paper availability due to the reduction in supply and those successive price increases will continue to be a really serious impact on our outlook for the Print segment. Inventory investment, while it is higher, we do believe we'll have to maintain it at a certain level. We like to believe that, that won't be necessarily beyond the middle of next calendar year, certainly hoping that by the end of the financial year we should all see a bit of the stability in supply. We do see that the supply lines elsewhere in the world are very full, and there wasn't in any time probably led to exacerbation of shortages that a real difficult element was the passive raw materials. We have 2 components in our raw materials, the general paper used in what we call a [indiscernible] and general publications. And then, of course, we get into the newspaper area, and it's there where we faced with much dramatic price increases and really a marketing quality, which is quite difficult for us to manage that imported stocks went up dramatically. Much, much more than local domestic stocks. And with the supply dynamics, which sit within the Print industry, an element of use for because it's insufficient investing in the country to meet it. So unfortunately, we are importers of newsprint, and again, late at this point substantially, but the impact has been so big and we're hoping that, that starts to memorize in the period going forward as well. The cost reduction initiatives will continue and they have become a cultural norm in our Print business, which is not always pleasant, but we have now to do that quickly and move quickly and to push for those efficiencies and carry out taking out costs. And as you have seen in the Keshree's report that we'll continue to remove cost on an annual basis. and it offsets the cost of the restructuring in the first place. If we look at where we're going with Packaging and Tissue, Novus Labels is expected now to -- if this new consolidated base remain profitable and it's expending a lot of energy and more diverse and niche-based products. So that's less of a focus on the very, very high-volume, low-margin business. And we're using our both equipment and human expertise to move forward into some interesting new products still aligned to the Packaging business. And obviously, the fact that it's largely paper-based is something which we're pushing from a sustainability point of view. ITB's performance, as we've said, it's really done well. We see no reason why it shouldn't continue on its current trajectory. The plant utilization is good. Market reputation is good and we're rather pleased with the performance on ITB and looking forward to sustaining that going into the future. So if we take a look at the group outlook just in summary. Top of the list is the acquisition of Pearson SA and as has been reported in latest SENS announcement that all the conditions present taking net for that transaction effective date is next Wednesday, which is the 30th of November. And then as Novus will own 75% of that business going forward, we look very, very forward to bringing that into the group and letting it really transform the bottom line Novus Group and in turn to open up some new opportunities in the publishing space. We're already a strong player in the education space, but this is a different aspect of that. And for the first time, Novus really now owns some intellectual property through this acquisition, and we think there is a dramatic change. It will also allow us to change our pure dependency on Print from this platform, that intellectual property can be delivered in both digital and Print formats. And I think we're entering an exciting phase for improvement and sign of the change, moving away from the pure consolidation and time process to something, which is a more expansive forward looking. We will obviously be very focused management procurements and those challenges. As I said, we are hoping that, that cycle is coming to an end during next calendar year. We will continue to monitor and take measures to the extent that we can to avoid those dramatic increases. What we do at least see is an element of leveling the playing field amongst ourselves and our competitors that at least [indiscernible] buying paper even if it is accelerated over very, very high cost levels that we should be able to compete on [indiscernible]. We continue to review the Print capacity and adjusted efficiencies going forward. And I know this is a bit of a well-placed statement, but it is true of our daily lives in Print as we have had to adapt to volume reductions. We've had to take the capacity reduction with it and reduce capacity, but we stay very relevant to have good capacity, good capabilities, which we remain very proud of, and we will be able to respond to more changes as we go forward. The interesting one is the capital allocation process. So we obviously steered away from the consolidation strategy of connecting all the cash and giving back to shareholders. And it's good to have that ability to have cash, generate cash. Let's take advantage of opportunities such as the Pearson acquisition, which we're very pleased that we did, and we think it's going to create great opportunities. And I think we will now continue to be cash prudent once we get out of the success of moving capital investment, and we get the digestion of the Pearson acquisition under our belt, we'll move back to an issue looking at to resume dividends. And of course, also keep some powder dry should there be some opportunities to continue on this growth and diversification route. Again, I [indiscernible] that capital allocation, we've done on a very, very careful basis, there will be no careless use of capital on behalf of shareholders. So we look forward to changing that outlook. We have won significant assets, both disposal and held for sale, and participate we should have that disposal during the course of the next calendar year. And then of course with the adding on of the Pearson Group, we can also see that we now have to snap back a little bit from the Novus Group structure, and we will obviously structure accordingly to take best advantage of that and make we have the right management and efficiencies in place to deliver on that. So if we go into conclusion, I think that we really ended what was a very, very tough 6-month period brought upon us by really an amazing combination of events. We've seem to forget quite quickly that there was [indiscernible]. And it wasn't just foreign issues. We know that we also had the issue of Mondi paper mill going underwater during the floods. That also impacted us. So as much as we play in imports, all our local paper came to the pressure as well. So the Mondi issue was difficult. We've digested that. It had its own impact on our margins. And we go forward with -- we believe the adversities make us strong. But I think that we can be very pleased that we've responded very well to the changes. It is disappointing to have a squeeze on operating profit. But I think we preserve the fundamental structure of the business and very good shape to respond going forward. So in conclusion, I think it has been a... [Audio Gap] Folks, it wasn't a demonstration to prove how much we're suffering with load shedding that to us rather unfortunately timed that it can struck us. And so we generators kicked in and as can be bring some more details as we speak. But that did distract me slightly from my conclusion. Despite the adversities, we will continue to do what we can to deliver on much improved results going forward. And we're obviously very excited with Pearson addition in new year that takes the group [indiscernible]. We'll now pause and we'll take on your questions can come from online, please. We will take a chance to digest those, and we'll be back to you to address those questions shortly. Thanks.

Right. We're back, folks. We apologize for the interruption. We've had some technical issues, obviously, on powering phone. So we're not going to bring the cameras back on, but we believe that you can hear us. So we'll do our best to answer the questions. And take a quick response to that. There's a question which asks -- which specifically queries, was the volume reduction across the various products. One of the issues is wasn't intentional. And the second is that was it market reduction related or was it price increase related. So I can talk to that rather generally, and I'll cover a few points. So what we found was, firstly, our customers did find the need, although there was demand. So what we're quite pleased about -- diverting slightly. We're quite pleased that there was a bounce back in demand potentially. So the market post-COVID I think is trying to improve. What happened with the very high cost increase made the product in the customers' hands quite expensive. And therefore, in some cases, they would have trimmed their budgets. So that's one aspect. So unfortunately, the price increase did make the product affordability, and therefore, reduced volumes. And what I had is the second factor is that because certain of our competitors would have had maybe some lower price inventory in stock or have access to it for a period. There would have been a competition-related issue where we may have lost a word on price. So we've done our best to absorb what we could. But with such substantial increases, we're talking about more than just double digit increases in some of the paper we talk about as 30%. We couldn't absorb it had to pass that on in some cases that would cause customers to decide on whether they needed the product. And in other cases, our competitors may have taken some [indiscernible]. As that stabilizes, we have maintained good relationships with those customers and we believe there's an opportunity to claw back that quick. So that is across the board. As I said, the newspaper issue was more severe in that we have a differential in the imported price and the local price and we're having to smooth that out. And that is getting a little bit determination that, that was pretty much driven by a reduction in demand because expenses and the second one we got a competitive cost of [indiscernible] volumes. So I hope that answers that question substantially. If we go on to some questions related to Pearson. There was a question as to how long the loan will stay in place. I'm not in a position to answer that specifically, but I will point out that the loan is not a legitimate or a normal loan. It's a notional loan. So it doesn't have a balance sheet effect at all. But obviously, until that loan is fully paid, there's a distribution effect, a full cash effect. There's a further question relating to Pearson and to the first question as far as the paper price challenges. Fortunately, a lot of the paper that is used in the production of books likely is in fact, local production, and we have Mondi to thank for that. And of course, the buying cycle was fortunately Pearson's favorite that they were not heavily impacted by that. So as much as the industry was under pressure to respond, there was access to local paper to a large degree, which didn't impact us severely. And one hopes that with the lapse of time that, that paper you control will stabilize and therefore won't have a massive impact on Pearson going forward either. So I think the Pearson management team managed the procured very, very well. And while they did feel some element of impact, it was well mitigated by their buying procedures and the fact that of the paper is available locally. And there was a further question in relation to Pearson, and that was asking about dependency of the government. There's a very clear dependency because the largest customer of Pearson is government schools at this particular point in time, and we don't anticipate that changing substantially in the future. Obviously, we have a broader customer base, but government is quite clearly a strong asset in that particular area. I think that largely covers the questions that we've managed to decipher between the screens on and off and sitting in the dark. We can make a light of it, and it's become a little bit of way of life, but it's just one of those unfortunate things and it does demonstrate some of the challenges we're facing in our business. And I'm sorry that it gives us example to share with you. I think what I'll do now is I will close if there's no further questions. And I'd like to thank Keshree for her assistance in presenting and joining us today. And I thank you all for joining us today to listening. And obviously, as always, we open to further questions, which you may want to take offline, and we'll do as best to respond to those as quickly as possible. So thank you once again for your attention. And we look forward to joining you again in, let's say, 6 months' time. We have obviously some substantial update on the Pearson transaction because I think it can be really down and part of group. Thanks, everybody.