The Bidvest Group Limited (BVT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Bidvest trading update. [Operator Instructions] There will be an opportunity to ask questions later during the conference. [Operator Instructions] Please note that this call is being recorded. I would now like to hand the conference over to Ilze Roux. Please go ahead.

Thank you, Irene. Good afternoon, and good morning to all of our stakeholders on the line. We appreciate you taking the time to listen to us and engage with management on our trading statement and business update for the 10 months to the end of April 2021. We are proud of these numbers. And with that, I'll hand over to Mpumi Madisa, our CEO, to share some high-level thoughts around this trading update, and then we'll open up for questions. Mpumi, over to you.

Thanks, Ilze., and good morning and good afternoon, everybody who's on the line, ladies and gentlemen. As Ilze has indicated, we are really exceptionally pleased with trading up to the end of April 2021. Sequentially, what we have seen is an improvement in trading from the first quarter into the second quarter into the third quarter. And so our COVID recovery, if I can call it, remains quite strong, which is really pleasing to see. All divisions have delivered an improved performance from the interim period. And of course, if you recall, the last quarter of the 2020 financial year was quite a disaster on our side and mainly because of the lockdowns that we had both in South Africa and in our U.K. and Ireland operations. So also looking forward, we expect to see a better performance moving forward. In line with the JSC listing requirements, we are advising all our shareholders that group headline earnings per share and earnings per share for the financial period ending 30 June 2021 is expected to be more than 20% higher on the previous year. Just to give you a sense, without going into the individual divisions around where we see step-downs and where we see some uplift. So we have seen some uplift. Just from a step down perspective, from a U.K. and Ireland perspective, while Noonan and PHS have performed in line with expectation, it is within the context of a lockdown in both U.K. and Ireland for the earlier part of this year. And so those businesses could have performed better, but there was some constrained trading activity due to the lockdowns. As indicated, as of December, our businesses that are facing the travel and tourism industry remain constrained. We've seen that continuing into the early parts of this year, and so that's impacted some of our businesses in the services industry. And at half year, we gave you an indication of what that negative swing was. So it's specifically those businesses again. And obviously, the Financial Services division is also impacted from an FX perspective. And then the other big swing in our numbers is obviously the work and learn from home change in pattern. And we haven't seen any significant change from what we reported at half year. So those occupancy levels seem to be very similar from what we saw in the first half of the year. So the impact on the businesses remains the same. And obviously, the impact in this instance is mainly in our Services division and in our Branded Products division. From where we've seen an uplift in trading to date, commercial products. We'd indicated in the first half of the year that there was a lot of pent-up demand from a DIY perspective. We've seen some industrial activity also coming onstream, which has been good. And with the IPPs having been approved, we're also seeing some benefit from renewable projects that are coming onstream. Adcock in Branded Products, last year is trading for around March, April, was quite strong as people -- as there was pent-up demand, just before the lockdown and people are buying also for flu medication, et cetera. And so their comparative year was quite high and we weren't sure how they were going to be able to perform against that. And their performance has been resilient. Services SA, excluding the businesses that I referred to earlier that are facing the travel and tourism industry, is recovering nicely and is performing stronger than half year. And then back at Branded Products, this is more of a shift than an increase in trading. We generally have back-to-school in the first half of the year. And because schools only opened up in February, that back-to-school shifted into the second half of the year. And then lastly, from a bulk terminal perspective in our Freight division, LPG has performed in line with expectation and everything is still going well there. And bulk commodities also performed well. In relation to our international growth aspirations, we're also proud to report that we've been able to finalize 2 bolt-on acquisitions for Noonan, the first one being Interact, which is a technical service provider in Ireland, and this strengthens Noonan's hard service offering in Ireland. And we've also finalized the Axis Group, which is a security and cleaning company in the U.K. From a balance sheet perspective, the balance sheet remains strong. Cash generation is strong. Asset management has been good. And this is a particular highlight for us given the supply chain challenges that we continue to see into this calendar year. We spoke about what some of those supply chain challenges were at half year, and we're still continuing to see those challenges into the second half of the year. From a Board perspective, we've made 2 appointments onto our Board. Eric Diack and Alex Maditse retired and have been replaced by Sindi Mabaso-Koyana who's also Chairperson of our Audit Committee; and Lulama Boyce has also joined our Board. And then lastly, in terms of COVID-19, the safety and health of our employees remains our #1 priority. We are now in the second wave. We have reiterated communication in terms of our safety protocols across all our businesses. We are confident, though, that having had the experience of the last couple of months, we are better prepared probably today than we were in April-May last year to deal with COVID-19 and are very comfortable to trade through this period in as safe a manner as possible. 95% of our employees are back at work, and the 5% that isn't is predominantly Noonan and PHS employees who are on furlough. And we also have some employees still in our factories locally in South Africa, with plans that we hope to have everybody back at work by the 1st of July. That's my high level summary, and happy to take questions. I'm sitting in the room with Mark, our CFO; and Gillian, our Executive Director; and Ilze has already introduced herself.

Irene, we are ready to take some questions, if you could manage the line accordingly, please.

[Operator Instructions] Our first question is from James Twyman of Prescient Securities.

Could I just ask, the Interact business that you bought, could you just give us some idea of how large it is and what -- exactly what a technical service provider, what sort of business exactly that would be in relation to the existing Noonan business? And whether how easy it is to look for acquisitions at the moment in the current COVID environment and whether you're having much luck in terms of being able to be searching at this time?

Hi, James. And so a technical services provider, maybe let me take a step back and just talk about FM. So generally, in a facilities management bundle, you have what you call sort of soft services and hard services, where your soft would be your cleaning, your security, your end of month pest control, hygiene, et cetera. And technical services would be your more maintenance services, where you're providing maintenance for HVAC and various assets within a building. So you clean the building, but you also maintain the assets in the building, is essentially what the technical services is. So technical services isn't new for Noonan. We just have been [ subdown ] actually in Ireland from a technical services sector. So we've always been very strong and #1 and leading from a soft service perspective, but we've always needed to bolster technical services. And this is exactly what this business does. And I suppose it just enables you to provide your clients with a full circle, soft and hard service offering. Essentially, that's what it is. We do that in South Africa as well. So there is facilities management in [indiscernible], also similarly, exactly the same model, soft services, plus very strong technical services that we provide, for example into a telecom, et cetera. Can I disclose? Okay. You know, Ilze was...yes. I think we...Interact revenues, EUR 13 million, just to give you a sense of size. And then acquisitions in the current environment, we are finding acquisitions. There isn't like a huge stream of them, but certainly, we have capability. I think what's probably more important for us to disclose is the fact that the acquisitions that we're talking about now, we didn't just sign now. So these are acquisitions that we had actually started looking at in 2019 already, had started due diligence work already in 2019, and when COVID hit around March, we put a freeze on all acquisitions because it was the responsible thing to do at the time. And so when we're then comfortable, we then reengaged with management and all we really have to look at was COVID training. So we only really had to look at the recent months and to see how those businesses have actually reacted to COVID. So the acquisitions that we're talking about now, we picked up then. We are still seeing some here and there. There isn't a huge amount. I suppose that everything that's important is I know what our appetite is. We don't like -- excuse me, we don't like distressed assets. So those really sit outside of our pipeline. Thanks, James. I hope that answers your question.

Our next question is from Roy Campbell of RMB Morgan Stanley.

And well done on a good trading performance. Three questions. I'll just ask them one at a time, if you don't mind. The first one is that you've mentioned supply chain issues across -- it looks like it's across a number of divisions. Could you maybe just give us a little bit more detail on what those supply chain issues are and what that means for your cost inflation, whether you can pass that on?

Roy, can I ask that to ask all 3 questions and then...

I guess, that's fine. All right. So the second question is maybe just to get a better understanding of what the PHS exposure is to the NHS in the United Kingdom. So obviously, we know that you are servicing some of the temporary sites, whether it be vaccine or the Nightingale and so on, but to the actual NHS hospitals, the kind of exposure that you have there. And so does the clearing of the surgical waiting lists or temporary surgical sites or more frequent deep cleans improve the actual demand for your services? So if I can really just understand that. And then in your automotive division. So [ NAMs ] just printed 33,000, close to 34,000 new car sales through dealerships. Is that being hampered by the OEM supply issues? So could that be higher? And is that having an impact on used car prices? Those are the 3 questions.

Roy, thank you. Let me deal with these. I'm going to do -- deal with them in reverse order, if you don't mind. In terms of automotive and the impact of OEM supply chain, I mean, I think, it's been very public at the moment in terms of the impact of chips and supply of parts, et cetera. It's definitely having an impact on our ability to be able to sell. And would sales or would volume sales have been higher if supply had been there? Absolutely. And I think we're expecting that to continue for a couple of months from now. Is it impacting secondhand car prices? Yes, it is. And in fact, we are seeing secondhand car prices trading up a couple of percentage points on medium growth at the moment. So it's definitely pushing secondhand car prices up. So that's your third question. The second question in relation to PHS and their exposure to NHS directly. We don't have a significant direct exposure to NHS. There's obviously an indirect exposure, but we're not seeing anything massive in that perspective and no particular concerns around it. And then more broadly around supply chain issues, which obviously we referenced in this trading update. We're seeing it across the board in a number of areas. So the auto one we've already talked about. We're seeing it in areas like steel supply. We're seeing it on PVC supply. Where else are we seeing over there?

It was products on -- like the Yamaha and...

Yes. Yes. Your imported products in Yamaha, et cetera. At this point, we have been able to pass on the impact of cost inflation. We're just not sure for how long. So if this inflation cycle continues and is elongated, we're not sure how long we're able to pass that cost on.

Our next question is from Anthony Geard of Investec.

I just want to ask a question of clarification around the comments, first up, which says that your operating and financial performance exceeded prepandemic comparators. So can you just give us a little bit here? I mean are we talking FY '21 HEPS is explicitly going to be ahead of the FY '19 base? Can you give us a little bit of guidance? Are we talking operating or at the headline earnings level and of course, being marked for -- of the stronger rand, which I presume is an appreciable headwind against the translation of PHS, Noonan earnings, et cetera.

Okay. Thanks, Anthony. So one of the things that we have been doing is obviously tracking trading performance. So that statement was directly linked at trading profit, okay, as a base. And the 9 months that we're talking about that are prepandemic is July to March. But if you think about July to December, comparison would be 2019, okay? And then even kind of January, February, March, is still a bit of a prepandemic because the pandemic kind of lockdown only hit on the 27th of March. So we've only got about 3 days of it. So when we're talking about trading exceeding prepandemic, we're talking about a big 2019 comparator base, which is non-COVID, and call it, 3 days of COVID that you get in March. And then obviously, April hit full lockdown. So we actually say talking about it from a trading profit level, comparing a base that is predominantly 2019.

Our next question is from Ross Krige of JPMorgan.

Just one clarification from me and just one question. So just to clarify, on the second paragraph, when you talk about all divisions delivered improved performances compared to the interim period, what exactly is the interim period? Is that interim '21 for the first 4 months of H1 or something else? And then on the second question is just with regard to M&A. There's been reports in European media about other acquisitions done by Noonan. Don't know if you're able to comment on those at this time or if we should just wait for H1 -- H2.

The gagging order's in the court.

So interim is our half year, so December. So that will be December 2020. And then...

Sorry, Mpumi, I'm just -- so presumably -- so the references to year-to-date, so that's 4 months. So would it be versus 4 months in H1, or....

No, Ross. The reference, we talk about a full 10 months when we talk about it. We're saying the performance of those divisions for 10 months have been stronger than the performance for the first 6 months.

Okay.

So the businesses continue to grow in the second -- in that 4 month period. Now that we're in loss position, if you like, if you want to put it another way.

Right. Okay.

And maybe, Ross, an easy way of saying it is that we had Q1, which is the base. Q2 was stronger and Q3 was stronger.

Okay. That makes sense, great.

M&A, yes, we signed Cordant, and it's an acquisition that Noonan has done in the U.K., also security and cleaning.

Our next question is from Nick Webster of HSBC.

Just 2 questions, please. One, can you comment on some constraints around the U.K. operations due to lockdowns? I assume you're referring to the, sort of last 3 months. Your suggestion seemed, I guess, that PHS, [indiscernible] et cetera, could have been stronger. However, it feels that they've also benefited from being in vaccination sites and everything that's sort of going on around the U.K. with that. So I'm just trying to sort of square away the positive versus negative impact of those 2 sort of competing forces, if you like, in relation to your comment. And the second one was just maybe a little bit more update on the LPG volumes that you talked to and how that's going.

Yes. Thanks, Nick. So I'll tackle the PHS Noonan question, and then Mark will.... [Technical Difficulty]

Thank you, ladies and gentlemen. We have been rejoined by the main line. Ma'am, you may go ahead.

Apologies. So apology, it seems we got cut off, and I'm not sure where we got cut off. So Nick, maybe if you can help me whether I fully answered the question or not.

So I didn't hear any of the answer at all. So I don't know if anyone else did.

Okay. Sorry.

Sorry. Apologies.

Okay. Apologies for that. So my response was that at half year, we'd indicated that we were seeing a drop in contractual revenue as a result of the lockdown because of the customer closures, and that was impacting both Noonan and PHS. But the noncontractual revenue, and let me place that, so the noncontractual revenue from a PHS perspective was more than offsetting the decline in contractual. And in terms of the U.K. operations for Noonan, the noncontractual revenue was enabling them to keep the operation or trading results flat. And we're actually seeing that still also happening into the last couple of months, January, February, March, April. And I hope that gives you a sense of kind of which is stronger. So whilst there is the impact of the lockdown, because noncontractual is strong, it's compensating for the decline. I'm going to ask Mark to just respond on LPG.

Sorry, Nick, a lovely response you didn't hear at all. So the LPG volumes have really been good. So when we bought the facility online, which was in November last year, November, December volumes are pretty much tracking as we expected. And then since then, they have actually accelerated and actually well ahead of where we expect them to be. And obviously, as we go into the cold season now, energy utilization goes up, we're seeing those volumes go even further. So certainly performing well ahead of expectation.

And then one last question. I forgot the first time around. You seem very, very bullish on cash flow, which is great. Are you able to give us some sort of steer towards what sort of net debt position may look like towards year-end, given the performance you had in the second half?

I'm hoping to see it continue to improve. The swinger for us is around working capital and where we land. And what we were a little uncertain about is to what extent we would see absorption in the second half, just as business starts to pick up. At this point, after 10 months, we're still in a release position. So in that context, I'm still bullish in terms of improving our net debt position.

Our next question is from Paul Steegers of Bank of America.

Just a question on your earnings guidance. Given last year, you had impairments and some closure costs and COVID costs and range of other things, I'm just wondering if your 20%-plus growth in headline earnings and basic EPS also translates into normalized headline earnings per share. I'm not sure if you're willing or able at this stage to give that guidance. But on the on the $0.10, $0.28 last year, would that be a similar outlook? That's the first question.

So Paul, yes. Yes, it would be.

Okay. That's great. And then just on PHS. In the first half, you did highlight and you showed us a very strong operating margin improvement, given some of these big, big contracts that you'd also won. But you also highlighted that some of the synergies hadn't yet come through. The line had, et cetera, but some of the other synergies that you'd highlighted at the time of acquisition. I'm just wondering if you've managed to sort of reap some of those? And if those strong first half margins that we saw at the operating level are likely to continue into the second half of PHS.

So Paul, the short answer is, of the 5 synergies that we targeted when we initially did the transaction, we've only done the [indiscernible] one. And to be honest, until we're able to effectively travel, not only to the U.K., but to go and see our suppliers, it's very difficult to get in and do the others. I mean, you're talking about group-wide procurement between Steiner and PHS. You're talking about range extensions within the PHS model. You're talking about looking at the management structures within the PHS environment. None of those things can really be actively managed until we can physically get into those environments. So really, they're all on hold, I would think, practically until Q1, Q2 of next year when you can reasonably expect to travel. And then once we're able to travel, we -- I think we're going to attack them much more aggressively. So if you talk about, we've got additional margin uplift from certain of the COVID services -- these once-off COVID services that we're now providing, as those start to taper off, our expectation is that we will start attacking those synergies and hopefully offset the loss that you can have from the COVID services terminating.

Our next question is from [ Sean Brains ] of [ Mazi ] Asset Management.

Just 2 small questions, and they're probably quite insignificant. I think we've dealt with the first one. Just on normalized headline earnings. Have you excluded the disposal of -- well, the 2 disposals that you mentioned. So the now -- I just lost my train of thought here. Just the...

BidAir and BCR, is that what you mean?