Super Group Limited (SPG) Earnings Call Transcript & Summary

Good morning, all and welcome the Super Group Limited, 30th of June 2024 results webcast. This morning, our Group CEO, Peter Mountford, will take you through the results presentation that will be followed by a question-and-answer session at the end where Peter and Colin will deal with your questions. [Operator Instructions] I now hand you over to Peter.

Good morning, ladies and gentlemen. Thank you for the introduction, John. The Super Group year-end presentation will commence with an overview of the financial highlights for the year to June 2024. We will also touch briefly on prevailing market conditions and provide an analysis of divisional performance. Colin Brown, our Group CFO, will then take you through the detailed financial results for the year. The webcast will then conclude with a summary of Super Group's prospects for the forthcoming financial year to June 2025. The group continued to capitalize on opportunities in a challenging and evolving market as demonstrated by substantial new client acquisitions, successful contract renewals and increased market share. Rigorous cost management continues to be a focus throughout the group. The weakening of the average rand exchange rate and the acquisitions of AMCO in the United Kingdom and right side up in South Africa contributed to the 4.6% increase in the group's revenue to ZAR 64.9 billion. EBITDA decreased by 1.4% to ZAR 8.45 billion due mainly to weaker performances in the supply chain Europe and dealerships U.K. businesses. Operating profit of ZAR 3.79 billion, decreased by 5.6% with the overall group margin of 5.8% being impacted by weaker margins in the supply chain and dealerships divisions. Operating profit margins increased in the fleet division. Earnings per share of [ 12.9 cents ] decreased by 97.3% due to the impairment of goodwill, whilst earnings per share decreased by 25.9% to [ 353.8 cents ]. Operating cash flow decreased by 3.4% to ZAR 8.57 billion. And net asset value per share decreased by 7.4% to ZAR 42.90. Gearing, excluding the IFRS 16 impact and the securitized warehousing funding was 26.5% as of June 2024. The group's trading environment remains challenging. Geopolitical tensions, supply chain and higher interest rates have exacerbated cost-of-living pressures on consumers in all operating geographies. Portfolios in South Africa had a considerable negative impact on the Southern African supply chain operations. The European and U.K. operations, a further material decline in automotive and time-critical volumes severely impacted on profitability. This impact was also exacerbated by ongoing high interest rates in these regions. The Australian fleet lease operations remained resilient in the face of moderating consumer expenditure and escalating operating costs. These pressures may be reduced gradually due to moderating inflation at potential rate cuts, but little consumption expenditure growth is expected in the short to medium term. We now proceed to the divisional reviews commencing with an overview of geographic and segmental contributions as well as return on net operating assets. Super Group International and other African operations contributed 56% of the sales revenue and 54% of operating profit for the year to June 2024. SG Fleet in the United Kingdom dealerships now account for 46% of revenue and 52% of consolidated operating profit, whilst the German and Iberian supply chain businesses contributed 7% of revenue and minus 3% of operating profit. An analysis of revenue and operating profit contribution by division is provided on slide. Revenue contributions for the year from the supply chain, fleet solutions and dealerships divisions were 35.7%, 21.7% and 42.6%, respectively, which is broadly similar to the previous financial year. Operating profit contributing for the supply chain division was 29%. The fleet solutions and dealerships divisions generating 54.7% and 16.3%, respectively. A strong contribution from the fleet lease businesses partially compensating for the decline in supply chain and dealerships' overall contributions. The group's minimum strategic target for the post taxation return on net operating assets is weighted average cost of capital plus at 40% premium. This calculates to a return target of 9%. The group's return on net operating assets for the year to June 2024 was 8.4% compared to 10.2% in the prior year. Supply chain South Africa businesses reported a 2.5% decrease in operating asset returns to the 9.1% level indicated, mainly as a result of a significant decline in commodity export volumes. European supply chain returns decreased from 2.4% to minus 4%, reflecting the impact of the further reduction in automotive volumes and excess logistics capacity in Germany. Fleet Africa, the return on net assets improved to 12.4% compared to 11.6% in the prior year. SG Fleet returns increased marginally from 11.2% to 12% largely as a result of a strong order book and resilient vehicle residual values. The dealerships in South Africa reported a decreased of 2.1% to the 18.1%, indicated due to lower premium sector volumes, whilst the United Kingdom dealerships reported a decrease of 7.9% due to delayed new product releases and a dramatic fall in used vehicle prices. The supply chain divisional analysis is provided separately across the African and thereafter, the European supply chain operations. Supply chain Africa's consumer businesses, including SG convenience, Lieben Logistics, SG Consumer and Digistics delivered an excellent performance as a result of new business wins and contract renewals. Supply chain Africa's revenue declined by 2.3%. Operating profit dropped by 7.4% due to weak performances in the commodity transport businesses. The division's operating margin decreased from 7.1% to 6.7%. The industrial and commodity transport businesses were negatively impacted by significant decreases in coal export volumes, border delays and slow turnaround times at South African ports. Vast majority of copper exports bound for China and the Middle East are now being rerouted from Durban to Dar es Salaam and Walvis Bay. Significant migration to these 2 ports took place in the final quarter of this financial year. The loss of southbound volumes has made the South African hauliers less competitive on the exports corridor resulting in lower revenues and margins across the division. Prevailing cabotage laws also impact both South African and Zimbabwean hauliers operating into Dar es Salaam and Walvis Bay. Bad debts in the division's coal operations resulting from financially distressed customers, including Wescoal Mining, negatively impacted profitability within these businesses. Industrial businesses were negatively impacted by weaker customer volumes, lower operating margins, particularly in relation to the distribution of automotive and mining equipment spares. Supply chain Europe's revenue increased by 29.1%, ZAR 5.8 billion, largely due to the acquisition of AMCO, which contributed ZAR 1.35 billion and the weakening of the rand against the euro. The division's overall performance was disappointing with an operating loss of ZAR 87.7 million. This was due to a sharp decline in automotive parts distribution volumes across Europe and a significant erosion in gross margins due to excess vehicle capacity in Germany. The European time critical distribution sector declined by over 29%, and these businesses are being restructured to realistic volume and pricing parameters. In Spain, 2 key clients of Ader discontinued their next-day delivery operations, negatively impacting volumes. The carrying value of goodwill in inTime has been impaired by EUR 59.7 million or ZAR 1.21 billion in the second half of the year due to changes in the key market growth assumptions and projected cash flows of this business. Despite the significant automotive market contraction this year, a conservative market growth has been projected in Germany at between 1.7% and 4.9% per annum over the next 5 years. This is fundamental to the impairment raised. The weakening of the average rand against the euro negatively impacted the results by ZAR 114.4 million. At this point, we progressed the fleet solutions businesses commencing with the SG Fleet operations. SG Fleet reported an increase of 5.4% in revenue and a 4.5% increase in operating profit, driven likely by a strong growth in delivery volumes. This was partially offset by lower profits on end-of-lease disposal. Operating expenses were adversely impacted by buoyant labor market conditions, integration costs and ongoing technology investments. Historically, pent-up demand drove strong levels of tender activity in all SG Fleet's channels. Volumes in the Novated channel were excellent, although the supply of some mainstream vehicle models remains constrained. Finance commissions and sales revenues from ancillary products grew by 50% and 22.6%, respectively, due to an increase in funded new deliveries and extensions. The weakening of the rand against the Australian dollar positively impacted the results by ZAR 46 million for the year under review. Fleet Africa's revenue increased by 3.7% to ZAR 1.13 billion due to a growth in ad hoc rental volumes on existing contracts. Operating profit increased by 5.6% to ZAR 256.7 million due to improved margins on shorter-term rental agreements. The joint venture with Cooperative Bank in Kenya was negatively impacted by lower used vehicle sales volumes and delays in parastatal spending. Moving now to the dealerships division and commencing initially with the South African operations, currently comprising 48 dealerships and representing most of the major brands in the country. Dealerships South Africa reported revenue growth of 1.8% on the back of stronger new and used vehicle sales. New vehicle sales volumes increased by 4.9%, strongly outperforming the comparable NAAMSA decline of 6% for the year. Used vehicle sales increased by 4.3%, and optimization of inventory and trade-in values partially mitigated the price erosion being experienced in the South African market. South African dealerships' operating profit decreased by 1% compared to the prior year. Dealerships U.K. revenue increased by 6.9%, mainly as a result of higher pricing across new and used vehicles and the weakening of the rand against the pound. New vehicle sales volumes were in line with the previous year, whilst used vehicle sales volumes decreased by 4.2%. Operating profit declined by 36.8% to ZAR 200.8 million, mainly due to a significant margin erosion in used vehicle sales. This reflects the substantial market correction in valuations that took place in the first half of this financial year. Ongoing supply issues resulted in a notable decline in Ford's volumes and market share. Ford's decision to discontinue the best-selling Fiesta model materially impacted sales performance and there have been further delays in the release of the new Ford Puma. The weakening of the rand against the pound positively impacted the results by ZAR 7 million for the year. At this point, I'll hand over to Colin Brown, who will take you through the detailed financial information.

Thank you, Peter. Good morning to everyone on the webcast. Beginning with the statement of comprehensive income on Slide 20. Total revenue increased by 4.6% to ZAR 64.9 billion and EBITDA was down 1.4% to ZAR 8.45 billion. Operating profit was down 5.6% with operating margins decreasing to 5.8%, mainly due to lower margins in Europe and the U.K. The capital items related to the impairment of inTime's Goodwill and intangibles by EUR 59.7 million in the second half. Net finance costs rose by 20%, of which 5% related to higher interest rates and 15% to higher net borrowings. Profit after tax decreased by 71.9% and headline earnings per share decreased by 25.9%. Headline earnings excludes the impact of the impairment. Moving to the statement of financial position. The increase in property, plant and equipment, mainly related to vehicle purchases in the supply chain businesses. Total lease portfolio assets increased by ZAR 23.6 billion due to growth in on-balance sheet deliveries in SG Fleet. Inventories are 4.8% lower than the previous year as a result of a drop in new car inventories in the U.K. dealerships. Cash and cash equivalents decreased by 2.7% to ZAR 8.8 billion. The next slide provides some detail on the equity and liabilities of the group. Securitized warehouse lease borrowings increased as a result of the growth in on-balance sheet deliveries in SG Fleet. ROU lease liabilities were slightly down and trade and other payables were in line with previous year. The net asset value of the group decreased by 7.5% (sic) [ 7.4% ] to ZAR 42.90 per share. Moving to net borrowings. Super Group raised a net ZAR 262 million in bonds during the year. The increase in Africa's net debt by 31.5%, mainly related to the funding of acquisitions, CapEx and working capital. The group remained well within its debt covenants during the year at both Super Group and SG Fleet levels. Group's net borrowing balance was ZAR 25 billion at year-end. Turning to the statement of cash flows on Slide 24. Operating cash flow decreased by 3.4% to ZAR 8.6 billion. The second half had a favorable move in working capital with a cash inflow of ZAR 120 million for the 6 months. The lease portfolio working capital outflow of ZAR 6.9 billion comprises the net purchases of vehicles in the fleet businesses. IFRS treats this as working capital, but it should probably be treated as CapEx in your financial models. Cash outflow from investing activities amounted to ZAR 2.9 billion. Moving to the rest of the cash flow statement. The net inflow from financing activities was ZAR 4.4 billion, which mainly came from lease portfolio borrowings in SG Fleet. The additional investments in existing subsidiaries included increasing Super Group's shareholding in Lieben Logistics to 80%, buying up the minority shareholders in SG Coal and acquiring an additional 1 million shares in SG Fleet in the first half. The group ended the year with ZAR 8.8 billion in cash and cash equivalents. Thank you. I'll now hand back to Peter to go through the prospects of the group.

Thanks very much, Colin. Concluding now with prospects for the financial year to June 2025. Super Group anticipates continued macroeconomic and infrastructural challenges in the forthcoming year. Now Southern African environment marked by declining disposable income, Supply Chain Africa's consumer businesses anticipate modest growth in the coming year. This growth is expected to stem from ongoing new business gains and contract renewals rather than an increase in core customer volumes. Poor coal export volumes, border delays and slow turnaround times at the South African ports will continue to hamper growth in the industrial and commodity transport businesses. The copper export volumes lost to Dar es Salaam and Walvis Bay are unlikely to be fully recovered in the short term, although it is anticipated that some recovery in South African's volumes will occur from February 2025. Supply chain Europe will face tough trading conditions with contracted automotive parts volumes and excess vehicle capacity in Germany set to persist. The rightsizing of inTime is progressing as planned and should result in an improvement in financial performance in the forthcoming year. New customer wins and the positioning of the courier businesses are expected to enhance the performance of the Iberian-based, Ader. SG Fleet has performed exceptionally well over the past 2 years, partially due to new vehicle supply constraints, the direct positive impact this has had on used vehicle residual values. This business is expected to perform consistently well in FY '25, although post taxation earnings are forecast to be slightly lower than in the current financial year as used vehicle prices stabilize. The negative impact on used vehicle residual values will be partially offset by higher numbers of vehicles being sold. Higher interest costs on corporate debt due to maturing interest rate swap will also add pressure to the next year's earnings. Increased activities on existing contracts and good growth in ad hoc rental volumes should see fleet Africa produced solid results. With little progress being made in the issue and award of tenders by parastatals, the business will continue to develop its private sector customer base and grow its funding, maintenance and insurance service offerings. Dealerships South Africa is expected to deliver another resilient performance with strong contributions from the services and ancillary product activities. The division's growing representation of volume and value brands will help meet the changing need of a pressurized South African consumer. Improved availability in new Ford models should see dealerships U.K. achieve a reasonable recovery, although the British consumer continues to feel the impact of ongoing high interest rates. Kia and Hyundai are expected to deliver sustained growth for the division, albeit at exceptionally low margins. Strong demand for commercial vehicles will support improved performance in the year ahead. By prioritizing innovative client solutions and maintaining a strong focus on cost containment and cash generation, the group is well positioned to deliver a resilient financial performance in the year to June 2025. The group has declared a dividend of [ 60 cents ] per share based on a consistent 5.9x cover on headline earnings per share. Thank you on behalf of Colin Brown and myself for your attendance at this webcast. We invite you to put forward any questions arising from the presentation or related financial reports.

All right. Good morning, again, I'm Peter Mountford here. We have some questions. The first one is from [ Bianca Treble ] at Optimum. Are you seeing significant acquisition opportunities in supply chain Europe, given the weak environment in the region? And are you looking to increase exposure through acquisition? The straight answer is no. All of the participants in this market are experiencing a significant decline in volume. Our time-critical volumes within Europe are down 29%. So we are most definitely working on some amalgamation thoughts, which should generate significant synergies, but would not involve an investment from our side. [ Bianca Treble ] again, have you started considering Chinese brands in your dealerships? If not, why? Yes, Bianca, part of our dealerships' strengths has been to go to multi-branded facilities. We also already strongly represented across Haval, Chery and Omoda, and we have applied for representation of [indiscernible] Foton and MG. Right. Then Bianca again, what is your thinking on the stake in SG Fleet? And would you consider selling down that stake to unlock value for shareholders given the significant discount to NAV? Bianca, we look at all of our opportunities across the portfolio. That's not really a question I can go much further, given that there are 2 listed companies involved in that scenario. Keagan Martin, Mergence. What is the revenue split between new and used vehicles in the U.K.? In addition, can you share volume figures on both new and used vehicles in this region? Keagan, the revenue split is approximately 54% new vehicles and 46% used vehicles. The volume, therefore, new is 15,900 vehicles and the volume on used is 13,300 vehicles. Adam [indiscernible]. Are you able to comment on your view on the threat to the group of the growth in Chinese OEMs, conceptually SG, inTime dealership U.K. and SA are under threat? No, Adam, we see that as a significant opportunity. Let's leave inTime for now across the dealerships. So the proliferation and growth of Chinese brands in South Africa and, to a lesser degree, in the U.K. offer us a significant opportunity to increase our exposure in the more affordable end of the South African and potential U.K. markets as well. With regard to inTime, yes, the reality is the infiltration or growth of Chinese brands in Europe is obviously a threat to the European automotive manufacturers. We are relieved that you're starting to get some pragmatic responses in Germany. You're starting to see some of the OEMs who insisted that battery technology was the way to go, reconsidering those positions. You will have seen that with Mercedes-Benz reconsidering their position and continuing with combustible fuel engines. So you're starting -- we hope to move to a very rational response to these issues in Europe and hopefully, that will improve the German, French, Spanish and related automotive industry. [ Nick Kriha ]. He is saying the composition of the world car market is changing rapidly. How do you see the long-term prospects for the U.K. dealerships business? I note that Ford appears to be steadily losing market share in the U.K. Nick, absolutely, I mean you've seen world car markets, but not world. We've got to say, you've seen the European market in disarray. This emphasis on battery vehicles as opposed to combustible fuel vehicles. The failure really of the battery vehicles in most markets, very low residual values on secondhand vehicles in those markets. So those issues are at play. Hopefully, we're getting a more pragmatic solution playing out and most certainly, mobility and vehicles will be with us into the future. You're absolutely right with Ford. Ford has been a very, very difficult place for us in the last year. Ford discontinued a year ago, the best thing vehicle in the Europe, which is the Fiesta. And obviously, we had significant delays to 13 months on the release of the Puma. Ford's market share has dropped to 5%. I think we will -- you'll see a significant effort in maintaining that market share. And the launch of the now Puma product is positioned quite nicely. And in fact, in August, Puma was the top selling vehicle in the United Kingdom. They're also coming out with another new model in the next 3 or 4 months. And their commercial vehicles remain very, very strong in the European environment. [ Shenea Brea ]. SG Coal minorities bought out, how does this affect this business? Does it need the ownership? No. Shenea, we bought out the minorities because we were -- we had multiple layers of share schemes -- employee-type share schemes and BE schemes and our central group scheme is so far as it applies to South Africa is very strong at the moment, essentially more than an effective black shareholding, is well over 50% and our BE scorecard is a Level 2, and in fact, increased in this -- in quantum this year despite the changes of targets. So we're strongly positioned there, and it doesn't make sense to have these minority layers called down into the individual businesses, which are expensive and an administrative burden as well. David Rossouw, Fairtree. Please, could you share expectations for working capital in FY '25 as well as through the cycle -- as well as through the cycle outflow level you have in mind per year? Would you -- can you have a look at that, Colin?

Sure, Peter. So we would look at about ZAR 600 million to ZAR 800 million outflow for the 2025 year. And through the cycle, it will range between ZAR 500 million and ZAR 1 billion per year. That would be our rule of thumb.

Richard Simpson, how material is SA Coal exports in Southbound copper transport to the Durban port in the overall supply chain Africa division? They are very material. The SA Coal exports -- the commodity businesses are about 40% of our supply chain operations. And the copper transport to Durban is significant. And the impact of seeing volumes moving to Dar es Salaam and Walvis Bay in the last quarter of this financial year was very significant and probably knocked 65 million PBT of the numbers of the overall division just in relation to the Zimbabwe operation. [ Shaqueer Sally ]. Our net finance costs increased 20% year-on-year to ZAR 1.2 billion. How significant would you -- sorry, it's quite small and tighter. How significant would the expected rate cuts be in reducing net finance costs for the business in the next fiscal year? Can I give that to you, Colin?

Sure, Peter. So reductions in interest rates would be quite significant. But bear in mind that we do pass through interest rate volatility to our clients in the fleet businesses, Fleet Africa and SG Fleet. So an element of that would be passed back to the clients.

[ Janet Bray, Lorin ]. Dealerships U.K., Ford was a major brand for you. How much of a gap to the discontinued models leave? How will this be filled? Yes, Janet, the gap left by the Fiesta was significant in the previous financial year. With the Puma coming onstream now, the major portion of that gap is fulfilled. And we do as well see some new 4x4 models coming into that environment. And we've got some faces coming through in the commercial vehicles. So we believe Ford will perform more strongly in the U.K. in the next year. Nick Greifer. Super Group has spent over ZAR 30 billion in the last 5 years, ZAR 13 billion of working capital and ZAR 17 billion on CapEx. The enterprise value of Super Group is only ZAR 20 billion. This is a very negative signal from the market. How do you intend to respond to the signal? Surely, SG Fleet needs to be sold to unlock value. Nick, what you are highlighting here is quite a major anomaly in IFRS. So what you've got is the investment into the fleet lease in SG Fleet Australia, appears in working capital. But the underlying creditor -- so you bring the debt to working capital, the underlying creditor does not appear in working capital and gets dropped down to the funding line, which totally misrepresents the situation in terms of working capital. And therefore, I think that adjustment is necessary. And maybe, Colin, do you want to put some more color on that?

So in the cash flow, you will see ZAR 6.9 billion cash outflow in the working capital line. That is really CapEx. So if you move that down to the investment side, then you'll get a far better representation of working capital movement. And the CapEx is an investment in a fleet that we get a return on in both SG Fleet and Fleet Africa.