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

Good day, ladies and gentlemen, and welcome to the Bidvest Interim Results Presentation. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Ilze Roux. Please go ahead.

Thank you, Irene. Good afternoon, and good morning, everyone. We're now [indiscernible] time zone, east and west. So my name is Ilze, and I have the pleasure of welcoming you on the call today. Thank you for taking time out of your busy schedule to hear the Bidvest story. The delivery of yet another good result for all stakeholders despite a challenging macro backdrop globally. As a customary, Mpumi Madisa, our Group CEO, will make some high-level remarks before Mark Steyn, our CFO, delves deeper into these results. Mpumi will then come back with a detailed review of the divisional performances and close with our value proposition and outlook. There will be an opportunity to ask questions at the end of the session. Without further delay, I hand over to Mpumi.

Thank you very much, Ilze. Good morning, good afternoon to everybody, and thank you very much for joining us. So I guess starting with our collections from my perspective. I think the group has really delivered a very pleasing result against what has been quite a tough trading environment where growth has really been very pedestrian and limited. Our half year results are characterized by the following 4 key drivers: firstly, strong new business has been secured in the period, both in South Africa and in some of our international operations. Secondly, in a highly competitive environment, with discounting starting to be the new norm and the depreciating rand has added further cost pressures, gross margin management has been very good. Third, expense management across the group has been outstanding. And this has been done, notwithstanding a high inflation environment across all our geographies. And lastly, we successfully executed on our M&A pipeline. We've concluded 9 transactions in the period, and our global expansion strategy is being well executed. And we've also recently acquired acquisitions that have contributed to this global expansion strategy. Firstly, we doubled our facilities management footprint in Australia through the acquisition of Consolidated Property Services. We've made our first entry into Asia with the acquisition of Rental Hygiene Services in Singapore. We've advanced our global hygiene consolidation strategy by acquiring 3 hygiene businesses in 3 different territories, the U.K., Australia and Singapore. And lastly, our South African acquisitions have created new opportunity set for growth in the data print and packaging space, and they've expanded our existing offering in office products and aviation service group. Reflecting more broadly on the results we've achieved all of this whilst keeping our focus on sustainable growth. And today, we employed 5,100 more people than we did in the prior year. And we continue to ensure that our growth is coupled with a reduction in our environmental footprint. Moving to our interim results and just giving a couple of highlights. Revenue growth of ZAR 62 billion is up 8.8% on prior year, with acquisitions contributing 2.8% to the top line. Gross margin declined to 28.9% from 29.5%, and this is mainly due to higher distribution costs, higher wage inflation and rand weakness. Expense management has been outstanding with expenses increasing 3.6% way below inflation and on a like-for-like basis, only 1.9%. The group's trading result is excellent, with trading profit of ZAR 6.5 billion, up 11.8%. And on an organic basis, trading profit was up 9.3%, and the trading margin has improved to 10.5% from 10.2% with 5 of the 7 divisions reporting double-digit profit growth. Our offshore operations now account for 22% of profits compared to 20% in the prior year. Cash generation at ZAR 3.7 billion is strong and has almost doubled year-on-year. We spent ZAR 3.2 billion on M&A. And in my opening, I provided some color on the acquisitions that have been concluded. Our gearing is modestly up at 2x EBITDA compared to 1.9x in the prior year, and this was primarily due to the increase in the offshore debt for acquisitions and there's also a foreign exchange impact that Mark will unpack when he goes through the balance sheet. Having deployed capital for growth, both for acquisitions and investing in assets, we're pleased to report that our returns are broadly stable, was ROFE flat year-on-year at 38%. Our ROIC at 15.8% compared to 16.3% in the prior year and despite significantly higher interest rates, our return on invested capital remains above the group's WACC. Our higher net finance costs have moderated headline earnings, but we still believe that in the current environment, a 5.3% increase in HEPS and a 6.9% increase in normalized HEPS is a solid result. We're pleased to declare an interim dividend of ZAR 4.67 per share, up 6.9% in the prior year, and I hope that our shareholders will be happy with that. I'd like to hand over to Mark for the financial overview.

Thank you, Mpumi, and good morning, good afternoon, everyone. I'd like to start with a few introductory comments just to contextualize the results. As Mpumi indicated, it's a solid set of results. We've seen pleasing organic growth across most sectors, supported by very active M&A cycle and good cost control. While the trading environment remains challenging, all divisions by one have made good progress. The increase in inflation, especially wages, fuel and distribution costs, interest and exchange rate movements are impacting gross margins, which have fallen slightly. However, good expense control has resulted in positive operating leverage and an improved trading margin. The half year working capital outflows is seasonally consistent with the prior year, but it reduced nicely. Generally, the growth of inventory is in line with our revenue performance, with the exception of renewables in BCP and new and used vehicles in Automotive, both are receiving specific attention. Trade payables have reduced, reflecting the additional inventory held beyond normal bit of terms and higher floorplan funding in Automotive. This will reverse in the second half. The cash performance is very pleasing with good cash generation over the 6 months. There's been limited domestic funding activity in the last few months with just 2 bonds issued at improved spreads, and there have been no changes in our international funding lines. We did do a drawdown on our euro loan facility for our Australian FM acquisition, but we have good debt capacity, both internationally and locally, which is sufficient for the potential M&A pipeline, which is in the mix. Importantly, we have amended our debt mix to be overweight on variable interest rate debt in anticipation of rates starting to come off in the latter part of the year. The growth in the underlying net debt base, together with a higher average interest rates and a weaker rand is increasing our interest costs. This half year has seen good M&A progress with 9 acquisitions accounted for. This includes consolidated in Australia, which doubles our FM presence there and RHS in Singapore, which is our first foray into the Asian market. The balance of the acquisitions are a nice mix of smaller bolt-ons, both local and international, and the pipeline continues to look very positive. The only disposal to reference is Bidvest Life, which we are currently in a process to sell and that's been reflected as a disposal group held for sale in the accounts. From an accounting perspective, we have [ mix ] with the application of IFRS 17, which is relevant for our insurance businesses. The impact of this was negligible for the group. With this as a backdrop, let's have a look at the more detailed results. In terms of revenue, revenue up 8.8% to ZAR 62.1 billion, and revenue growth has been seen across all the divisions and then double-digit growth in 3 of them. We've seen good volume growth, which was achieved in services, SA, Services International, Freights and Branded Products. In Commercial Products and Automotive, we've seen price/mix and gross margin pressure. Our acquisitions have provided 280 bps in revenue growth with the organic increase of 6%, very, very pleasing. We'll unpack the divisional results in more detail later in the presentation. In terms of our gross income, our gross income up 6.6%, while our gross margin has fallen 60 bps to 28.9% as a consequence of the higher inflation which is prevalent in all the jurisdictions we operate in, together with some rand weakness and higher distribution costs. That said, our expense performance was very, very pleasing. Operating expenses up 3.6% versus a revenue increase of 8.8%. The normal inflationary pressures were moderated by business streamlining, reduced overtime and reduced load shedding as well as reduced ECL provisioning in this half. Our expense ratio has improved to 18.7%, it was 19.6% in the prior year. And there remains a keen focus of cost containment right across the group. In terms of trading profit, trading profit up 11.8% to ZAR 6.5 billion. As Mpumi alluded to earlier, 22.4% of our trading profit is now offshore. So that's up from 20%. So it's growing nicely. And we've had good underlying organic growth of 9%. We're very happy with these results as all businesses by one came to the party. Branded Products and Services SA were outstanding with the office products and office automation, particularly strong, supported by packaging and consumer products. In Services, SA, travel continues to see a resurgence, which has supported our lounges and to some extent, our catering businesses, while security and the sale of consumables into the office environment also very good. We've seen strong results from Freight and Services International. In terms of Freight, volumes through the ports saw growth with reasonable rate increases and a positive product mix. While in Services International, we had good organic growth supported by both scale and geographic expansion. We had good results in Commercial Products relate to a very, very large renewables base in the prior year. While in Financial Services, we saw good interest growth and very good cost containment. The Automotive division contracted in what is now a very tough consumer market. And Adcock was flat on last year. From a HEPS perspective, HEPS up 5.3% to ZAR 9.879 and normalized HEPS, which excludes our acquisition costs and the amortization of acquired customer contracts is up 6.9%. In terms of dividends, we've declared an interim dividend of ZAR 4.67, up 6.9% from the ZAR 4.37 last year. And we've got a cover ratio of 2.25x, which was within our policy range of 2x to 2.5x normalized headline earnings. Moving now to our funding, and we continue to maintain a conservative and consistent approach to funding. We hold 62% of our gross debt offshore and 76% of our gross debt is of a long-term nature. More importantly, as referenced earlier, 56% of our gross debt is now at variable rates in anticipation of future interest rate cuts. Our gross debt has increased to ZAR 33 billion is up ZAR 4.7 billion, driven by acquisitions of ZAR 3.2 billion in total, working capital absorption and an increase in floorplan facilities in Automotive. Our net debt, which is after cash and cash equivalents is up ZAR 6.8 billion to ZAR 25.8 billion. We are well within our covenants and our net debt-to-EBITDA ratio, as Mpumi referenced earlier, is at 2x versus 1.9x with ForEx impact adding 0.2x to the ratio. Offshore, the net debt-to-EBITDA in hard currency is at 5.3x, which is post the consolidated and RHS acquisitions, and this compares to 4.7x last year. Domestically, this ratio is at 1x. Our average cost of debt is at 6.1% pretax is up 90 bps from the last year, and this was materially impacted by the movement in the underlying base rates. Our EBITDA interest cover of 7.3x compared to 9.4x last year is still well ahead of our covenant of 3.5x and was impacted by higher underlying net debt levels and increased interest rates. And to some extent, the weakness of the rand as well, but still very comfortably -- this ratio is still very comfortably in excess of our covenant ratio. The debt maturity profile is good with no sizable maturities in the near-term. We do, however, continue to monitor the larger international maturities in the context of the interest rate cycle. The RCF and term loan maturity in 2026 has 2 further 1-year extension options, and there are no material domestic maturities to speak off. Moving now to our cash flow. And cash flow is always a highlight in a Bidvest presentation. Cash flow has been very good over the last 6 months. The underlying cash generated by operations before working capital, up 10.4% at ZAR 8.3 billion versus ZAR 7.5 billion in the prior year. We've had seasonal working capital absorption of ZAR 4.6 billion, which is better than the ZAR 5.5 billion in the prior year. Our inventory growth has been -- is up ZAR 1.2 billion and is predominantly in Bidvest Commercial Products, Automotive and in Branded Products. The growth in commercial products largely represents the additional renewable stock. And while renewable sales remained -- still remained good, they're off the elevated levels that we saw in -- driven by load shedding last year. The Automotive business remains under pressure, and we've seen a material slowdown in both new and used volumes. This has caused a buildup of inventory, which has been further impacted by a strong push from the various OEMs. We've got an active plan in play to reduce these levels by year-end. Overall, though our stock days -- while our stock days have moved out, we're comfortable with both the quality and the salability of the stock. The debtors reduction is off the back of better collections across a number of the divisions and a reduction of sales in the latter part of December. The underlying book is in good shape with consistent overall [ Asia ]. Creditors have increased consistent with the previous year trend and higher vehicle floorplan funding. Our cash conversion is at 26.7%, nicely up on last year at 7.6% and this is anticipated to improve in the second half of the year. The cash flow graph we presented here, you can see the cash -- the seasonal cash outflow, which is consistent over the various years in terms of the group's normal working capital cycle and the operating cash generation remains very strong. Lastly, now moving to our balance sheet. We've had CapEx through the 6 months of ZAR 2 billion versus ZAR 1.5 billion last year. We've maintained our asset base and invested further in rental assets in both Bidvest SA and Financial Services. From a freight perspective, we have a number of capital projects which are currently under way to expand the capacity and the repurpose of the butane spheres in BTT has now been commissioned in October. As previously mentioned, we have reflected the Life Assurance business as a disposal of the sale, and this is currently in a disposal process. Our mergers and acquisitions activity has been heightened over the last 6 months with 9 transactions accounted for. Our total spend was ZAR 3.2 billion, representing the larger acquisitions consolidated in Australia and RHS in Singapore and then a myriad of smaller bolt-ons. And the pipeline, which we're actively pursuing looks quite positive. We concluded some domestic funding activity in the last 6 months with an additional ZAR 1.4 billion in bonds, raised to reduce -- [ raise ] that reduce margins and we rolled the preference share of ZAR 0.9 billion for a further 3 years. We then also utilized GBP 90 million of the offshore RCF facility for the acquisition of consolidated. We have good funding facilities in place with EUR 458 million in offshore funding available for M&A, and that's post the acquisition of consolidated in RHS and then a further ZAR 15 billion available in domestic facilities in SA. Just some final concluding thoughts. We often talk about the resilience of the Bidvest business model. And this is all the more relevant in the current environment. The ability of our decentralized businesses to pivot and reprioritize opportunities is what differentiates us. The underlying performance reflects the renewed energy of a strong and engaged management team. And as we build this group, we continually focus on strengthening this team, which is like that of what we do. Our ability to proactively manage margins and limit expense increases will remain a key focus area. And finally, our M&A team supported by appropriate debt capacity will continue to actively pursue new acquisition opportunities.

Thank you very much, Mark. If we can now move to the operational reviews, I'm going to start with Services International. This team has delivered an excellent result and profits are now equally split between our Hygiene and Facilities Management businesses. Revenue at ZAR 19.3 billion is up 21% driven by strong new business secured, continued hygiene pool growth and contributions from the acquisitions of consolidated property services in Australia, Robinson Services in Northern Ireland and on the hygiene side, Rental Hygiene Services in Singapore, Pure Hygiene in Australia and [indiscernible] Hygiene in the U.K. The gross margin is slightly down due to higher wage increases across all our territories, the restructured contract in South Africa and lower office occupancies in Australia. The above inflation expense increase was due to higher wage inflation and the consolidation of costs from the acquisitions. Trading profit at ZAR 1.9 billion is up 16.5% and on an organic basis, trading profit is up 9%, an excellent result from the team. The trading margin at 9.7% is down from 10% in the prior year due to the gross margin reduction, which I've explained earlier. Cash generation was outstanding and ROFE at 131%, whilst down on last year remains a very acceptable return. Turning to the operations. As I said earlier, Trading profit between the FM and Hygiene businesses is now split equally and [ 78% ] of profit in this division is now generated offshore. The Facilities Management Businesses delivered a good result driven by good new business wins in Ireland, South Africa and Australia, and of course, consolidated made contribution to the cluster. The Hygiene businesses delivered an outstanding results, driven by continued strong hygiene pool growth in South Africa and the U.K., new business wins and the hygiene acquisitions made -- they're made in contribution to the cluster. Congratulations to the Services International team for an excellent set of results. Moving to Freight. The team has delivered an excellent result and had a particularly strong second quarter performance. Revenue at ZAR 4.5 billion is up 2% driven by annual price increases and increase in overall grain volumes and increased oil and gas activity in Namibia. On the other hand, bulk mineral volumes were down on prior year. Gross margins improved due to the reduction in disbursements in our Clearing and Forwarding business as freight rates declined in the period. Expense growth was contained due to reduced variable expenses as we handled less bulk mineral volumes through the terminal. Trading profit at ZAR 1.3 billion is up 16%, an outstanding result and the trading margin at 28.4% was up 3.4% on the prior year. ROFE at 60% is a very high return for this CapEx-intensive division and was driven primarily by the higher trading results. Turning to the operations. The bulk terminal businesses in South Africa performed well as they handled more grain volumes, driven primarily by higher wheat volume. As I said earlier, bulk mineral volumes were lower due to a significant reduction in commodities such as manganese and coal. The operations benefited from an overall positive product mix and reasonable rate increases. The butane spheres commissioned in October have increased our butane capacity in Richards Bay. And as a reminder, this CapEx was ZAR 172 million. Our Namibia operations delivered an outstanding result, benefiting from increased oil and gas project activity and increased bulk volumes as mineral exports were redirected from South African port. Our Clearing and Forwarding business grew profit on the back of higher air volumes and new business secured. And lastly, in terms of growth CapEx [ Board approved ] ZAR 550 million to build multipurpose tanks, and we expect these to be commissioned in the first half of the 2025 financial year and ZAR 185 million has also been approved for fuel tanks, which will be commissioned in the 2026 financial year. Both these projects are in Richards Bay. So to the Freight Team well done and congratulations on an excellent performance. Moving to Commercial Products. The team delivered a satisfactory result of a very high base and in a highly competitive trading environment. Revenue at ZAR 8.6 billion is made up of a mixed bag of turnaround performances across the division, resulting in a 3% overall increase. Renewable volumes was flat year-on-year. The gross margin declined primarily due to margin reduction in renewable sales, negative price mix and an extremely competitive trading environment. Expenses were exceptionally well managed, increasing marginally as the teams used this lever to counter the margin erosion. Trading profit of ZAR 741 million is up 2% and as more 8.6% is slightly down on prior year due to the gross margin decline explained earlier. ROFE at 27% is down on last year 51%, primarily as a result of the [ excess ] renewable stock on hand. Turning to the operations, standout performances were delivered by our niche electrical businesses, who focuses on industrial projects where demand remains robust. Packaging businesses that are part of what they supply is into a growing OEM export market performed well. And we've also seen good market share gains from our businesses that supply personal protective equipment, workwear, catering equipment and lifting and rigging equipment. Business is exposed to consumer discretionary spend that is significantly under pressure struggled in the period. And as I said earlier, the demand for renewables remains but has tapered to volume similar to the prior year. Congratulations to the commercial product team for a credible set of results. Moving to Services South Africa. The team delivered a very good result with all clusters up on prior. Revenue at ZAR 5.9 billion is up 14.4%, with all clusters delivering double-digit revenue increases. The top line performance was driven by strong new business wins in the security and aviation cluster, improved volumes in the travel and tourism industry and increased bulk volume sales in the Allied cluster. We also had a contribution from the Interloc acquisition. The gross margin reduced slightly due to a slight change in sales mix. Expenses increased above inflation due to increased trading in the travel cluster and an increase in insurance costs. Trading profit at ZAR 622 million is up 12.3% and excellent results and the trading margin at 10.5% is down than last year, mainly due to the increase in expenses. ROFE at 101% is down on prior year but remains an acceptable return. Turning to the operations. Increased travel volumes materially boosted growth in the travel cluster. The catering and lounges cluster shows good growth with lounges outperforming the comparative period. Security and aviation cluster secured excellent new contracts, benefited from improved air cargo volumes and the Interloc acquisition made a contribution to the cluster. And lastly, the Allied cluster showed good growth as demand for water, coffee and laundered garments increased and to the Services South Africa team well done on a very good set of results. Moving to Branded Products. This division was a standout performer in the period, producing an outstanding result with all clusters up double digit on the prior year. Revenue at ZAR 6.7 billion is up 10.6% driven by strong organic growth in office products and the contribution of Roan, Green Home and Brandability acquisitions. In a highly price-competitive environment, with increased client requests for price reduction, rising input costs and exchange rate volatility, the team did well to keep the gross margin flat year-on-year. Expenses were well managed, increasing marginally on the prior year. Trading profit at ZAR 647 million is an impressive 23% ahead of prior year. And if we exclude acquisitions, profits are up 19%, which is really outstanding. Trading margin is also up at 9.7%. ROFE at 37.8% is significantly up on prior year due to a broadly flat funds employed and a material increase in the trading profit. Turning to the operations. The Data, Print and Packaging cluster delivered an excellent result driven by demand for print and labeling products and an increase in volumes from new and existing clients in the packaging space. The inclusion of the Roan and Green Home acquisition further boosted the cluster's results. The consumer product cluster delivered a good result due to excellent cost management and the restructure concluded in the prior year, positively impacted performance in the period. And lastly, the office product cluster delivered an outstanding result with all businesses in this cluster growing profits materially. Demand for office furniture and office automation was strong and our annual back-to-school volumes were good and the delivery is well executed. Brandability contributed to the cluster's profit for the first time. Congratulations to the Branded Products team for an outstanding set of results. Moving to Automotive. Automotive team held their own in a difficult trading environment, characterized by inventory oversupply, discounting in order to move stock, high interest rates and an extremely constrained consumer. Revenue at ZAR 12.9 billion is up 2% due to average selling prices increasing across both new and used vehicles but on the flip side, volumes declined in both categories. Gross margins came under pressure as discounting is now endemic in the industry. Cost management was excellent with expenses flat year-on-year. Trading profit of ZAR 365 million is down 1.4% due to the significant gross margin erosion, resulting in a reduced trading margin of 2.8% compared to 3.3% in the prior year. ROFE at 29.7% is down from 44.7% in the prior year due to increased levels of inventory and reduced profitability. Turning to the operations. New vehicle sales are down 5.2%, and this compares to an overall dealer market that is down 4.7%. This volume decline has also been exacerbated by a further gross margin decline. Some of the traditional brands that we represent had lost market share, whilst the other newer brands where we have no -- very little representation, have shown the biggest market share growth in the period. As indicated at the 2023 full year results presentation, we started discussions with some of these brands and I'm happy to report that we have since been awarded FAW and Mahindra dealer points and 1 FAW truck dealer point. On the used vehicle side, the knock-on effect from new has resulted in a 1.4% decline in used vehicle volumes and a further drop in gross margin. Our Namibia, dealerships delivered a standout performance or funded new vehicle sales and improved gross margin, a trend that is obviously very different to what we're seeing in South Africa. Service and Parts have shown a small revenue increase and managed to keep margins constant. Cubbi has been successfully launched and positioned itself as a credible independent used vehicle retailer, trading is tough, given the current environment, but performance is in line with expectations. Our diversification strategy in this position remains a key focus as we now represent 2 brands that have growing market share, Mahindra and FAW. Our entry into the independent used vehicle market has been executed through Cubbi, and we're also at various stages with bolt-on acquisitions that are complementary to our automotive offering. I want to congratulate the team. It's been a tough trading environment, and they've done their best and we just want them to keep their energy levels up. Last division being Financial Services. The team delivered a commendable result. The turnaround continues, and we're pleased with the improved performance. Revenue at ZAR 1.3 billion increased marginally by 0.6% driven by higher interest rates, growth in loans and advances and good ForEx revenue. However, leasing revenue was suboptimal in the period. The revenue line in Bidvest Life was reclassified to align with IFRS 17. Gross margin increased due to fleet disposal, better margin on the loans and advances book, and higher margins on the deposit banks. Expenses increased due to the IFRS 17 reallocation of Bidvest Life and a higher impairment provision in the bank. But other than this, expense control in the division was excellent. Trading profit of ZAR 257 million is up 15.7% primarily due to stringent expense control and a strong investment and income contribution. This has further resulted in an improvement in the trading margin from 16.6% in the prior year to 19%. ROFE at 15.3% has improved significantly from 3.2% in the prior year but remains the lowest ROFE in the group, and there's still a significant amount of work to be done to give the division's return profile to acceptable levels. Turning to the operational review. Bidvest Bank produced a good result driven by higher interest rates, increased payouts and then improved cost-to-income ratio. Fleet performance though remains below expectation and is still a key focus as this is the greatest opportunity set in the bank. Capital strength remains robust with key ratios above regulatory requirements. The short-term insurance business delivered an acceptable result both FinGlobal and compendium delivered excellent results. The Life Business improves profitability, but notwithstanding the decision has been taken to exit this business. We've already made the relevant financial disclosures and the disposal proceeds will be finalized prior to year-end. Also kindly note that there is no further update on the investigation into the life insurance industry by the competition commission. To the financial service team, congratulations on the turnaround and a [ pleasing ] result. Maybe just 1 or 2 points on Adcock. I generally keep my commentary limited because this is a separately listed entity, and Andy has already delivered the half year results. Our shareholding in Adcock has increased, and it's now sitting at 63%. And as previously communicated, we will incrementally increase our equity in the business as and when the opportunity arises. Adcock delivered revenue of ZAR 4.7 billion, up 1.4% and a trading profit of ZAR 622 million, up 1%. The company declared an interim dividend of ZAR 1.25 per share and the Adcock Board approved the share buyback. And so in the period, 1.7 million shares were acquired. Moving to the Bidvest value proposition. And especially on the nonfinancial aspects of the business that are equally important and also drive the financial results. Our focus on our people remains and in the half year, we now employ 5,100 more people than we did last year. We are improving our employee value proposition, and we are in the process of rolling out a medical benefit, for staff unable to afford a traditional medical aid. This is a big initiative in the group, and we are proud to have finally been able to find the right product to roll out. Sustainable trading remains top of mind, and we're making good progress in relation to our ESG framework, tracking ahead of target set to be achieved in the 2025 financial year. Safety in the workplace continues to receive attention and continues to be top of mind. And I'm pleased to report that our lost time injury frequency rate has reduced significantly to 0.96 per 200,000 hours worked from 1.48 in the prior year. And in terms of sustainability of power, the group now sources 2.5 gigawatts of electricity from renewable sources, and this is double compared to a year ago. Lastly on this slide, if you could please indulge me, I'd like to pause a little bit on the graphic on the right-hand side. Notwithstanding the challenges we faced in South Africa, as you know, at Bidvest, we are always looking for the silver lining. We are always looking for that small light that shines through that we can amplify. As corporate, all of us have the responsibility of selling one commodity. There is one commodity we all have at our disposal to trade and its hope and self-belief and at Bidvest we understand the [indiscernible]. And so I'm very proud that last year, we launched our partnership with Team South Africa, and we're supporting our athletes as they prepare for the Olympics and Paralympics in Paris this year. And through our tag line, 1 nation, 1 team, we aim to galvanize hope and unity in the country. If you reflect on how the Rugby World Cup last year, unified the whole country, it was just absolutely amazing. And if you also reflect on how the Cricket World Cup unified us, even though we didn't make it all the way and for the soccer levels, the Africa Cup of Nations, also unified us all the way to the semi-finals. So sport is amazing, and we're going to use this global platform to galvanize hope, and unity, 1 nation, 1 team proud to be Bidvest. As I close, moving to the outlook. The trading environment has been tough. It's been highly competitive. We've seen a further deterioration in certain parts of the South African economy, but notwithstanding all of this, Bidvest has delivered. Our broad product and service offering remains a key competitive edge, our geographic diversification remains a key competitive edge and our decentralized entrepreneurial model enables our businesses to pivot during a difficult time and therefore, give the whole group agility. This is also a key competitive edge. And so as we look ahead, the headwinds and the tailwinds are clear. The traditional seasonal trading trends are starting to reestablish and we can see them coming through in divisions, for example, like Freight. This, together with the nonrepeat of frenetic renewable sales and coal demand as well as weak vehicle demand makes for a tough operating environment in the next 6 months. Wages -- wage increases rather, continue to be well in excess of inflation and we'll do our best to recover as much as possible in the price recovery process. On the upside, it's back to basics. So we will be focusing on the following: #1, expenses. Operating expense management has been excellent and will continue into the second half to ensure consistent [ annual ] growth. Secondly, margins. Margin management has been good and our aim is to hold the overall margin flat year-on-year. Thirdly, cash, working capital focus and discipline will drive higher free cash flow as we near year end. Four, our bolt-on acquisitions have again demonstrated their accretive impact, and we expect the combined acquisitions to make a full contribution in the second half of the year. Five, new business has been strong, and a number of sizable contracts have been secured in the first half, and these will make a positive 4, 6 month contribution for the remainder of the year. And lastly, in South Africa, our businesses will continue to benefit from increased travel and tourism volumes. And we are starting to see other smaller [ trends ] like heatwaves that are driving higher water sales and also sales for cooling products. We've got a flu season coming in the fourth quarter, and this will drive demand for cold and flu medication and we also have some planned store rollout that will increase our base for attracting new customers. As I close, I would like to thank the team across the whole group for their hard work. Our aim is to deliver credible half year results. I believe that we've done better than that and the teams are focused on being strong. Thank you very much.

Thank you, Mpumi and Mark. I appreciate those details and color behind the interim results. Irene, I'm going to hand over to you to explain to our participants how to register questions that they might have, and then we'll start -- kick that off.

[Operator Instructions]

Let me kick off with some of the questions that I can see on the line that has been loaded. The first is a question with regards to the debt, Mark. The question is regarding the offshore debt that is maturing in 2027. Could you please provide a little bit more detail about what that represents.

Okay. Thanks, Ilze. So 2 elements to it. The first is 2 domestic -- small domestic bonds totaling about ZAR 1.3 billion, maturing in '27, '28 and those will be rolled as we see the environment at that point in time. The bulk of it that sits there is our $800 million eurobond facility that matures in September 2026. And we are busy looking at what options are available. You recall that when we originally launched that bond, it was the first international bond that we've done. And so we were fairly limited in that we had to go to market with something that was quite normal. Now that the debt market has seen Bidvest for the last 3.5 years and they know how we trade and they know what our debt looks like, I think it -- we might have opportunity to be able to offer -- we'll ask for a more varied debt offering at that point in time.

Thank you, Mark. Maybe a link to that another question around the comment is that your cash conversion seems low, which this investor concluded that it might be difficult to reduce debt as we continue to pursue M&A. So how does one do that? And would the group be open to an equity raise into the medium-term or identify assets to sell if this difficult trading environment continues beyond the current period.

Thanks, Ilze. So the cash conversion at the half year is always lower than it is at year-end. That said, I'm not unhappy with the cash conversions we've seen over the last 6 months. It's significantly better than this time last year. And we'll typically -- because if you look at our working capital cycle, what happens is we absorb working capital in the first half of the year, that obviously impacts that ratio. And then as we release working capital in the second half, that ratio tends to come back. So I don't have a particular concern and you can look at the history of our cash generation over the last 3, 4 years, about raising or generating sufficient cash to be able to settle our debt, we're very cognizant of what that debt level is in relation to the M&A pipeline that we have in play, and we continue to reassess that pipeline and reassess what acquisitions are in there in relation to the debt capacity that we do have. So comfortable, let's say, we are not considering at the moment looking for any equity raise or to sell assets to raise capital that's not in the mix. And if you look at our debt-to-equity ratio, we've been almost identical over the last 3.5 years at 2x. So comfortable with that level is we do monitor it. So not planning to issue equity to change for levels at the moment.

Thank you, Mark. And Mpumi, maybe this goes to you. The question is posed that with the poor performance from government with regards to infrastructure. What opportunities do you see Bidvest has to either partner with government or to take infrastructure assets to operate?

So I mean, we're constantly looking for opportunities to partner with government. We've always been very open to enter into public private partnerships in some form or other. We do have some discussions that are underway. We're under NDA, so unfortunately, I can't disclose some of those. But just to say that having an appetite, yes, we've got an appetite in the areas where we know we are experts in what we do and are really open to assist government in whichever way we can. Yes. But I mean, I think generally, just talking around infrastructure spend, it is low. We're not seeing much happening in that space. We would have thought that as we get closer to the elections, we may see kind of a surge in spending. We're not really seeing anything come through. And so from a trading business perspective, we're really getting value out of private sector spend that is out there in the market.

Thanks, Mpumi. Irene, let's hear whether you've got any questions on the line before I go back to the webcast.

We currently have no questions on the conference call.

Okay. All right. Mark, in a little bit more detailed financial questions. What is the view around CapEx this investor wants to make it as a percentage of revenue, but I know we stick to absolute, revenues is revenue and it moves -- so that's -- maybe you can just comment on. And then secondly, a question around whether there's an opportunity in the supply base to improve credit terms and whether you've seen any pressure on your suppliers in terms of repayments.

Okay. Thanks, Ilze. Just from CapEx levels, how we signaled typically, we will generally do between ZAR 3 billion to ZAR 4 billion a year in CapEx, roughly ZAR 2 billion of that would be maintenance and the balance would be expansionary that's typically what we have done for the last number of years, and we would expect that to continue. So you're maintaining your existing asset base and you're expanding where the opportunity [ success ] allow. From a credit line or credit terms perspective, it's interesting. I mean, that environment is obviously under significant pressure at the moment. And I mean, we would just like the rest of the market would do pursue trying to get improved credit terms, are we seeing significant move in that space in the current environment? No, we're not. It's largely static.

Thank you, Mark. Mpumi, it may be something that was topical in the paper a week or so ago, the new notional gas cliff that is imminent from 2026 onwards. The question is whether, given our involvement in LPG, whether the group would consider LNG as an alternative?

So, the answer is no. And the reason for that is that the process and the requirements around LNG versus LPG are very different. What we do on the LPG side is we just store. The ships arrive, we store and then the LPG gas is then collected from our terminal and kind of moves in land. That's really all we do. And LNG operation is far more technical than that. So the infrastructure [ build ] around LNG is a proper infrastructure build. It's nothing like what we do on the LPG side. And then secondly, on LNG, you're also mixing chemicals and gases, we don't do that. We're not involved in that. So it is a little bit more of a complex process. From a chemical perspective, we don't do that. We just store. And then, of course, if you're into LNG long-term, you need to think about distribution, right, in land. So it's not -- yes, it's just -- it's not what we do. So the answer is no. Our niche is LPG, and we'll continue finding more opportunities within the LPG space. You would not find us participating on LNG.

Thank you, Mpumi. Mark, maybe one for you. The ZAR 3.2 billion that was spent on acquisitions. The investors just looking for a little bit of guidance on the multiples paid on those. And I suppose linked to M&A, although I think you touched on it in your response to the previous question, at 2x debt to EBITDA, net debt-to-EBITDA looks like you're running out of some headroom for additional acquisitions. First, it just comes back to the cash generative nature of the group again.

Yes. So from a -- in terms of the margins we're seeing on the transactions that we've done, so typically on the smaller bolt-ons, we look -- we typically look for a range somewhere between 6x and 8x for the international larger transactions. If we're in the FM space, those typically will range. And so we're talking to sort of cleaning and security business and the like, that would be sort of between 8x and 10x. And then hygiene remains -- those multiples still remain a bit of a premium, certainly post-COVID, and we're seeing those somewhere in the regions quarter to 11x to 13x on an EBITDA basis. The second part of the question was?

Just the headroom on the net debt-to-EBITDA?

So that's the -- I mean, you actually answered the question is all around our cash generation and more particularly, what the cash generation will do in the second half. So typically, what you'll see is we absorb working capital significantly in the first half, released significantly in the second half, and you'll see those ratios come down and the headroom free up. So yes, it doesn't look a little [ squashed ] now, but it will certainly look very differently in 6 months' time.

Thanks, Mark. Mpumi, So a congratulatory comments here before the question is posed, a very good set of results. But the investors are asking -- considering that the macro outlook is looking increasingly challenging, what are the key issues that worry you in relation to the outlook and the guidance that you have given.

So yes, maybe 3 areas, but the 3 areas that I'm going to touch on are known, maybe 4. That's nothing new. Low growth is a problem, but it's nothing new. It's very difficult on an organic basis to shoot the lights up when you're not in a growing economy. I mean, at the moment, our organic growth is really driven by us being super competitive out there in the market, and we're taking business away from the competition. It's not like there's a whole new subset of opportunities that we're able to mine. So growth is a problem. It's really a problem. And it looks like a systemic in South Africa, and we seem to be in a bit of a [ rut ] that we can't get ourselves out of, but we find our way through it. The second one, also not known power is an issue. We talk about it less but that's because the last financial year, we invested quite a lot in terms of derisking our various operations, our factories, our warehouses, solar, generators, et cetera. And the cost of it was high, but it's essentially in the base now. But the reality is, again, if you're looking for a growing economy, if you don't have consistent power, it's a problem. If we're thinking about additional expansion to our factories, you have to think twice about that because of the power issue. So power remains a systemic issue for the country and for us. The third one also known nothing new. The logistics and the supply chain in the country continues to deteriorate. And we've always spoken about rail what was new in this half of the year that did impact the Freight division and not just them, but just inventory also in certain other parts of the businesses with poor marine services. You're aware of the number of ships that at some point, got stuck at the ports, couldn't come in and couldn't offload. And so the reality is that our logistics and supply chain is deteriorating and that is a problem. There are work streams in place between ourselves and Transnet and government in general around port and logistics. We're trying to push and make as much progress as we can, which is good. So the positive is that we're owning the problem. We're not kind of waiting for government to resolve it. We're putting in resources and expertise to help, but it is certainly an [ Achilles' heel ] for the country. And maybe the only other one to highlight that is peculiar and unique to this year is obviously, we're in an election year. And the election year is not just a South African phenomenon. It's a global phenomenon. Thereabout I think about 70 countries or so that are all having elections this year. There's a U.S. election. So the biggest economy is also going to have potentially a political change. I think that does slow -- that will slow things down somewhat in terms of decision-making. So -- and I guess we must expect where we've got exposure to government, we're unlikely to see any material decisions being made quickly, which is a [ pity ]. We don't have a significant amount of our business that's exposed to government. I mean less than 5% of our revenue comes from the public sector. So it's not massive. But there are certain discussions that we're having. It would be great if some of those could move. And then I guess the elections this year, people are a little bit uncomfortable because we don't know what's coming. And whether it's a coalition government or not from a private sector perspective, we have to worry less around the politics because we work with the government that is in charge at the time. So whatever the makeup of the government will be, it will be and we will work with the government of the day.

Thank you, Mpumi. Can I check Irene, if there's any question that's on the line.

We have no questions on the conference call.

All right. Mark, one for you. Does the offshore debt have recourse back to the South African operations.

So the offshore debt is guaranteed by the group. So yes, it's quite simple, not a complicated question.

Then investor note here how the bank -- how is the bank preparing for Old Mutual's launch of its own bank and the impact that would have on financial services.

So we've had various conversations with Old Mutual. Obviously, this is not something that has hit us fresh. We've been talking with Old Mutual around what a transition potentially looks like as they prepare for their own banking space. We're very clear about the impact on the bank from a deposit perspective and a profit perspective. And the team are working very hard in terms of replacing that particular revenue, profit and deposit line. Further than that I can't give you more detail.

Thank you, Mpumi. And then Mark, a question around the acquired businesses. Whether the -- with the contribution those will make in terms of revenue for the whole group. But I think the answer lies in the acquisition notes where one can see that there's very little seasonality when we even sort of look at the full contribution for 6 months.

Yes. I mean you can just -- you can take that number and you can pretty much double it and get into annual contributions.

So that should be in order. And then I suppose the last question around debt is given the large offshore debt, what type of straight scenarios does the management team think about when monitoring debt ratios.

Okay. I mean, obviously, we always -- we've got the various coverage ratios that we monitor. We separate them now, and we show you those separated between the offshore businesses and the local businesses. There's obviously an imbalance in the sense that we're generating less EBITDA offshore for a higher debt level versus where we are in South Africa. We always have the ability at any point in time if we needed to take debt capacity from an SA perspective and settle that offshore debt and bring that number right down. We don't do it because it's too -- it's expensive to do that. So it's a backstop position. You've got committed facilities to take out the debt if we needed to do it, but we'd much rather work that debt down using the cash flows of those businesses. So typically, what you will see, and let me give you an example of the original PHS transaction when we did it. When we did that transaction, we pushed the offshore element of our net debt-to-EBITDA to 5.7x and then progressively worked it down with improved cash flows from that business and other businesses over time, and we worked that down into the mid 4s. With the acquisitions that we've done now, consolidated RHS, et cetera, in those last 6 months, we pushed that level back up now to north of, I think, about 5.3%. And then we will progressively work it down. But we are very cognizant of what those ratios are. We're cognizant of the imbalance. We are monitoring it but we're not settling it because it would be cost -- it would be interest prohibitive to do that. But from a risk perspective, we can manage it at any point in time if we had to.

Thanks, Mark. Irene, one last check on your side. Otherwise, I think we have addressed the questions.

We have no questions on the conference call.

All right. With that, I'd like to thank everyone for your time and participation this afternoon. We appreciate your interest and we'll speak to you all soon. Thank you very much. Thank you.

Thank you.

Thank you very much. Bye-bye.

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.