Trellidor Holdings Limited (TRL) Earnings Call Transcript & Summary

So good morning all, and welcome to the Trellidor Annual Results Webinar for the year ended 30 June 2021. Terry Dennison, CEO; and Damian Judge, CFO, will take us through the presentation followed by a Q&A session. [Operator Instructions] Without further ado, I'm going to hand over to Terry and team to take us through the results. Thank you.

Thanks, Riaan, and good morning, ladies and gentlemen. Thank you for joining us today. And thanks to you, Riaan and the team at PSG Capital, for hosting the webinar. Well, what a decade this last 18 months has been, interesting times indeed. We're very pleased to have been able to end the year with a solid set of results in what has been very unusual business conditions. The results are really a story of 2 halves with the very welcome support from the market in half 1 and a good inventory buffer leading to a very profitable first half of the year. This then followed with a flattening of demand in half 2 and the unwinding of our inventory buffer to become more fully exposed to what has been very steeply increasing raw material and freight costs. Margins, as a result, declined in half 2 in what I believe is the environment reflective on our industry. Our 23% growth in revenue compared to the prior year is very similar to the numbers released by other public companies in the construction materials and DIY industries. So our salient points for the year. Headline earnings per share at ZAR 0.408 compared to ZAR 0.138 in the prior year, which we'll unpack a bit more further on in the presentation. Our cash from operations of ZAR 96 million is a 75% increase from the 2020 ZAR 55 million. Revenue at ZAR 518 million compared to ZAR 422 million in the previous year. And total dividends declared for the year are ZAR 0.21. We bought back ZAR 12 million worth of shares during the course of the year, and we'll unpack that a bit further in the presentation as well. Our strategic objectives that we set ourselves for '21 are depicted on the slide. Our inward focus on our business model reflects our view of the uncertainty faced by our industry in the South African economy. And I think by many industries in the South African economy. Our strategic objectives were to enhance our route to market, which is primarily to focus on high quality, in other words, high-margin sales and look to the opportunity to acquire underperforming areas or franchise areas and repeat the proven success of the previous 2 years in that strategy. Keep our focus on cash preservation and generation obviously reduces risk in the business and provides us with options in capital allocation going forward without having to raise additional capital. Our focus on improving efficiencies and cost control stands, and we've had a good year in that front. Developing and introducing new products and product derivatives to keep up with changing customer needs is important in our business, and we continue with that program. And we continued with the share buyback program. So how did we go on those strategic objectives and what have we implemented? The strategy of acquiring main center franchises when available has been extremely successful. In F '21, our comparative sales, that's apples with apples, these bought-back areas have increased sales by 46%, which well exceeds the 13% growth that was achieved by the third-party franchises in the same territories. We acquired our U.K. branch effective November 2020, and this has also performed very well in difficult circumstances. We've achieved our internal targets for the year and look forward to a full contribution in the upcoming F '22 year. Please also see Note 2 in the results release booklet for more information on the U.K. acquisition. Our Africa franchisees had a hard time during F '21, dealing with several headwinds, including quite serious logistic issues with cross-border challenges, national elections in key territories, tourism constraints impacting economies and general lockdown interruptions. Sales in Africa declined 3% year-on-year. Our focus on cash has yielded excellent results with cash from operations up 75% to ZAR 96 million from ZAR 55 million in the prior year. We're also very happy with the improvement of cash generation in the Taylor business, which was also up 75% for the year. Cost management has continued to be solid and despite some headwinds with gross margins being maintained compared to the prior year. This is despite the steeply increased cost of raw materials and freight. Comparable operating expenses have increased by 4.3% year-on-year, but this is after including the acquired operating expenses following the recent purchases of Durban, Johannesburg and the U.K. branches. The disruption in the supply chain for imported materials has also caused increased costs through stock shortages and resultant overtime to make up for production delays. In this context, our results are very pleasing. Although delayed against plan due to supply chain challenges, 4 new products have been developed and launched through half 2 of F '21 to meet changing customer needs and break into markets where we are traditionally weaker, primarily gated Estates. In response to increasing demand in commercial markets, which we've seen probably also driven by the riots in July of this year, we are planning the development of further commercial products and at commercial premises during the course of F '22. During the year, we continued with our share buyback program, and we've acquired and canceled a further 5 million shares at an average price of ZAR 2.35. This brings the total number of shares repurchased and canceled since F '18 to 13.1 million which represents 12.1% of the shares issued from F '18 to now. We have currently 95.2 million shares in issue. Looking forward to our prospects. I've talked to F '21 being a tale of 2 halves, with the very welcome tailwinds of the first half of the year turning into tougher business conditions in the second half of the year. Demand plateaued in the second half, and we faced increasing margin pressure due to exceptional increases in the cost of raw materials and freight. Significant disruption in import supply chain also caused numerous stock shortages that impacted on production with resultant increased costs. The key metric that we follow in our business is the volume of property registrations that have taken place in South Africa, and we can see the decline in registrations in quarter 1 and quarter 2 of calendar 2021 on the graph on the slide. While we're on this area, we thankfully escaped damage at our plant in Durban from the riots in July, but we did lose a full week's production due to the Trellidor factory closure. Taylor wasn't impacted in the riots in any significant way. Looking forward to F '22, early trade is in line with the relatively strong comparative period, despite that loss of week's production I've just mentioned in July. A solid result from our newly acquired U.K. branch has also helped in this process. F '22 will see a full 12-month inclusion of the U.K. branch compared to the 8 months that it was included in the consolidated results for F '21. In early July '21, we completed the acquisition of Johannesburg North and Midrand franchises and have consolidated this into our existing Johannesburg branch, which substantially increases its size and obviously gives it a better economic scale. We anticipate significantly improved sales from this branch as we have seen in other franchise areas acquired through F '20 and F '21. And we will continue the strategy of acquiring main center franchisees on a willing seller basis. Africa has underperformed in F '21 due to reasons already mentioned, and we anticipate a recovery in Africa in F '22. And to support this, we've increased our investment in marketing and management. Product innovation remains key, and we'll be adding some new derivatives of products to the newly launched Estate range, and we will also be adding to our commercial product offering to broaden our exposure to the commercial market. The recent additions of our product range during F '21 in both segments of the business have been well received by the market and are selling well, which should help boost revenue for the upcoming year. In the line of these steeply increased raw material and freight costs, we haven't, as yet, responded adequately in -- to these costs with core inputs increasing by well over 20% in some cases and freight costs increasing by over 400%. Carefully planned price increases will be implemented during the first quarter of this financial to protect our EBIT margin. The margin pressure is inevitable, but it's comforting that the entire industry is facing similar cost pressure. The benefit of these price increases will be seen from the second quarter F '22. Probably at this stage, it's also important to note, that in the Trellidor segment, significant value add with local South African costs is made in the factory to the raw materials acquired from imports, which traditionally has placed the Trellidor business in a relatively better competitive position in the industry. Our Board has declared a final dividend of ZAR 0.11 per share, which brings the total dividend for the year to ZAR 0.21, which represents a dividend yield on the volume-weighted average price in August of around 6.4%. Board will also continue to assess the opportunity to repurchase shares utilizing excess cash to enhance shareholder value. At this stage, I'll hand over to Damian, who will unpack some more detail in the numbers.

Thanks, Terry. Good morning to all, and thanks for joining us. Also a special thanks to Riaan and the team at PSG Capital for hosting us again today. Looking at the group financial performance. As Terry has noted, overall, the F '21 results have been very pleasing, when you consider the starting point having just emerged out of an unprecedented national lockdown. Revenue is up 23% from F '20, but more importantly, is slightly ahead of our pre-COVID F '19 levels, a level we only anticipated getting back to in F '22 when we presented our results this time last year. [ GEP ] is also up on F '20, but we have seen margin pressures during the year as a result of a weakening exchange rate through H1 and increased raw materials throughout the year, impact of which is that we have not returned to our pre-COVID margins. But through tighter overhead control as a result of improved operating efficiencies, we have exceeded our earnings levels with EPS up 296% on F '20 and 2% up on F '19. F '21 has provided us with a good base to build on. Even though we are back to pre-COVID levels, our African network has struggled to unlock post lockdowns and political elections in many countries. We also benefit from a full 12 months of earnings from the U.K. franchise in FY '22, which was only consolidated for 8 months in F '21. Overall, through Trellidor and Taylor, our revenue through Trellidor and Taylor is up 23% and 24%, respectively, year-on-year, which are very pleasing results given the related uncertainty that continues to persist. Trellidor's growth has been driven by the RSA market, in particular, and in particular, our main center branches, which are up 46% year-on-year. Africa, unfortunately, has struggled to bounce back after the initial hard lockdowns, which were implemented early in '21. A number of countries also have political elections during the year, which historically has been very disruptive for business. Following the acquisition of the Trellidor U.K. franchise through the course of Q2 F '21, the contribution of international has increased by 3%, as we benefit from the consolidation of the retail margin in the U.K. for 8 months in F '21. Taylor's strong F '21 is a result of very supportive home improvement spend in Cape Town and Johannesburg. Our market share of Durban and the rest of KZN region remains an opportunity for growth and has been identified as a strategic area for F '22. Looking at how the various product sets have contributed to revenue in F '21. The weak performance in Africa, as previously mentioned, has had a negative impact on the contribution of the traditional retractable range of products. And as a result, this contribution has declined 1% year-on-year in the Trellidor business unit. This decline has been absorbed by the more aesthetic-focused products, mainly our louver security shutter and the Clear Guard product range, which are up 2%. The contribution of these products is expected to continue to grow following the launch of the new Estate range, adding to our product basket through Q4 F '21. Taylor's aluminum shutter range continues to be the major contributor to revenue, and this is set to continue into F '22 with the launch of the new shutter-style product in Q4 F '21. The increased contribution of the Thermowood shutter or PVC is also pleasing as management have identified this as a growth opportunity previously. Our high-end extruded polystyrene product range of skirtings, cornices and wall panels has had an excellent F '21 with sales increasing 42% year-on-year. Given the weakened exchange rates during H1 F '21 and the continued raw material and shipping cost increases that have been absorbed during the F '21, an improved GP percentage overall is a pleasing result. Taylor has suffered a number of headwinds during the year and is -- as it is more exposed to the rising cost of imports, and this is evident in the increased percentage of materials to net sales in F '21. The knock-on effects of the logistical challenges as a result of the global pandemic and the Suez Canal blockage has resulted in abnormal overtime being incurred to ensure that customer service levels are maintained given the improved sales demand during the period. Given the fact that Trellidor's manufacturing process adds more in-country value to the base raw materials, it has been able to mitigate the impact of raw material increases through the majority of F '21. We have, however, seen an increase in materials through Q4, and this is expected to continue into F '22 for both businesses. As a result, as Terry has already indicated, selling price increases have been planned through Q1 F '22. At the start of F '21, we are anticipating to return to our F '19 levels through the course of F '22 as the economy slowly unlocked following the impact of the pandemic. Positively, we have returned to these levels in F '21, which is better than expected. The results in Taylor are particularly pleasing given the several headwinds we unpacked on the previous slide. They have significantly outperformed F '19 and we'll now be seeing further growth off this base. Trellidor was slightly behind its pre-COVID levels, but with the success of the franchise [indiscernible] anticipated recovery in the African market and the acquisition of the U.K. franchise, we are targeting to exceed pre-COVID through 2022. The group remains conservatively geared with no additional debt being raised through F '21. Interest cover ratios have normalized to in line with pre-COVID levels following an abnormal F '20. In terms of equity, 5 million shares were repurchased and canceled during F '21. The Board will continue to assess the opportunity to buy back shares to enhance shareholder value. Interest-bearing debt has also declined from ZAR 99 million to ZAR 80.4 million from this time last year. The supply of steel and aluminum raw materials has been challenging in both Trellidor and Taylor during F '21. And following the recent disruptions at Transnet after the cyberattack, challenges are expected to continue into F '22. As a result, inventory levels have increased in both businesses, which includes increased goods in transit at year-end in preparation for Q2 F '22. Our debtors book has continued to be robust with all the Trellidor franchises successfully weathering the COVID storm during the year. Taylor's distribution network has also shown resilience during F '21. The inherent weak economic conditions in South Africa, increasing levels of unemployment, GDP growth significantly below potential and corresponding pressure on consumer spending has had a negative impact on the group's performance recently, which was exaggerated by the impact of COVID in F '20. In spite of this, cash generation remains robust and continues to be the cornerstone of the investment case in Trellidor, as it gives us the flexibility to execute our strategies with limited debt exposure while still being able to distribute a healthy dividend flow and continue our buyback of shares. F '21 has produced another stellar performance from a cash generation perspective, with cash from operating activities and free cash flow being in line with F '18 levels despite reduced profitability. The Trellidor business unit continued its solid cash generation, but it was pleasing to see Taylor increase their cash from operations by 75% year-on-year. Unpacking our capital allocation during the year. From our return-to-shareholders perspective, if we distributed the F '20 postponed interim dividend of ZAR 8 million and paid out the F '21 interim dividend of ZAR 10 million, our ZAR 12 million was spent on share buybacks of circa 5 million shares at an average price of ZAR 2.35. As mentioned earlier, debt servicing, we paid down interest-bearing liabilities of ZAR 24 million, including interest, with a net interest of ZAR 3.5 million. CapEx for the year was in line with our depreciation spend at ZAR 7.1 million. We purchased the U.K. franchise, 100% shares in that operation. The purchase price net of cash was ZAR 17.5 million, ZAR 12 million of which was deployed from SA cash reserves to part-fund the first and second purchase price installments. Looking forward into H1 of F '22, we'll distribute the F '21 final dividend -- apologies for that error on the slide. ZAR 6 million will be deployed for the second purchase price installment -- or the final purchase price installment of the U.K. ZAR 4 million has been distributed for the purchase of the Johannesburg North and Midrand franchises. Capital is reserved for further main center franchises, as Terry has mentioned, on a willing buyer, willing seller basis. In terms of CapEx. Overall CapEx will remain in line with our depreciation, but we are excited about a special solar panel installation at the Trellidor factory in Durban, which will see us deploy ZAR 4 million in addition to our normal CapEx spend. And then as we've mentioned earlier, excess cash will continue to be applied to the buyback of shares where opportunity arises. Just in terms of the slide pack, we have also included our earnings per share breakdown, which just gives you the reconciliation of how we show the bounce back from F '20 to return to those pre-COVID levels. It also highlights, as Terry mentioned earlier, the steady reduction in weighted average number of shares from F '18, which is down from 108 million shares to 97.7 million on a weighted-average basis. The group balance sheet is also included. By way of comparison, we have returned to F '18 working capital levels from a stock and payables perspective. And this is highlighted, as we've mentioned, in response to the extended shipping times of imported raw materials in both Trellidor and Taylor. Our cash flow summary emphasizes the strong cash performance in F '21, underpinned by a good base in Trellidor and a strong recovery by Taylor during the year. Thanks very much, Riaan.

Thank you, Damian. All right. So we're going to move over to the Q&A session now. [Operator Instructions] So our first question is from [ Rudi van Niekerk ]. Terry, this one is for you. I think you've already addressed it to an extent. How does input cost inflation affect your margins and bottom line profitability?

Yes. Thanks, [ Rudi ]. I think what we're seeing -- I've seen once before in my career, this level of sharply increased import costs. And the dollar price of aluminum and steel, plastics, basically across the board, have seen significant increases through the year, well in excess of 20%. It's not possible to pass that level of price increase through to the market without damaging market share. So we plan carefully in these circumstances, and we bleed in selling price increases to the market, which we've commenced with. So there will be a second round of that end of the first quarter, so basically now to mitigate for the raw material price increases. Our focus for F '22 is to maintain our EBIT margins rather than our gross profit margins for the year. And through the next financial, to claw back on the gross profit margins as what we believe will happen is that raw material prices will stabilize. They might come back a little bit, but I think we're in a new normal, particularly when it comes to metals, the steel and aluminum sector. I think what is comforting to us, as mentioned before, is we do add significantly more value to the raw materials through the Trellidor plant when compared to our competitors in the market. So in a steeply increasing cost -- raw material cost environment, we're generally better placed than our competitors are.

Good. Thank you, Terry. Our next question is from [ Kelvin Craig ]. I note from advertising campaigns that Trellidor has now commenced offering finance to clients. What has the take-up of this offering been to date? And please talk us through the risk assessments and the model on providing credit.

Yes. Thanks for that question, [ Kelvin ]. The finance offering has been live for about 6 weeks now, and early uptake is very encouraging, I've got to say. The offering itself is through a third-party financial services provider. So our risk is well managed from that perspective. And what it represents is a very, very slick offering, quick to get finance approval, all done directly with the financial services provider, so which -- not through Trellidor, and also includes what I think is going to be very successful, is a very neat layby system. And laybys are quite a big part of our business in the sort of outside the main cities. So a slick layby solution is something that I think is going to work well through this offering. But yes, 6 weeks, early days and the uptake has been good. All through our third-party financial services provider, so our risk is well managed.

Excellent. Thank you, Terry. Our next question is from [ Mohamad Meiers ]. What do you expect your EBITDA margin to normalize at post absorption of some of the raw material price increases?

So our plan for -- thanks, Mohamad. Our plan for F '22 is to maintain the EBIT margins that we achieved in F '21. And to the extent that, that can improve, that's good. But how we're going to achieve that is, if you like, the selling price increases will be less than our raw material price increases. There will be a softening of the damage from that with cost control, which we are planning to be well below the selling price increases. So our intent is to maintain EBIT margins for F '22 that we achieved in F '21.

Okay. All right. So that's the questions to date. I see there's another one from [ Mohamad ]. Do you expect some -- do you expect home improvement spend to continue growing in the next few years? What trends are you seeing globally?

Yes. Thanks, [ Mohamad ]. What we are seeing is that the South African economy is turning to the positive. So we're seeing positive GDP forecasts, albeit off a low base. And I think any improvement in the economy is very, very welcome, and we are particularly well placed, having driven a lot of efficiency through our business over the last few years, for any uptick in the South African economy. Our main focus in the economy is the middle-income market and upper-middle-income market. That's the sweet spot of our offering. And we also go into the top end of the structure, and we're not really exposed to the bottom end of the earnings in the economy. So the trend on DYI, I do think there's more focus that we've seen through F '21 on the home environment where people are spending relatively more time. So I think that will continue. That said, we need a supportive economy for there to be available disposable cash to spend on the home environment. We're very encouraged as well to see the uptick in home registrations through the first half of next year, which have slowed down in quarter 1, quarter 2. But I think that trend will continue with the current low rates of interest. So those are all supportive for our industry. I think your question also went to global. So what we are seeing -- our global exposure, if you like, is Africa. And Africa's medium-term growth prospects remain very, very good. F '21, as we've already mentioned, wasn't supportive for us for all sorts of reasons. But we're anticipating our exposure in Africa to continue to show growth as Africa grows. And then in the U.K., which is our other main focus in terms of global, our exposure there is almost 100% in the commercial environment. But what we are seeing in the residential areas is an increased awareness of crime in the U.K., and we are investigating opportunities of bringing some of our residential-focused products into the U.K. to take advantage of that. So it's early stages but we are looking at it.

Excellent. Thank you, Terry. Our next question is from [ Bruce Anderson ]. Are there acquisition opportunities outside of acquiring willing seller franchises? Are there any diversification opportunities into similar manufacturing streams?

Yes. Thanks, [ Bruce ]. Acquisitions remains on our strategy watch list. So we've been biding our time and not taking significant risk in any major acquisition activity over the last number of years. And it's my sense that our economy has now bottomed. We've been waiting for it to bottom. And I think that has been accelerated by the advent of the COVID pandemic from the lockdowns, which I think, brought us down to base very, very quickly. And it's my sense that we are now turning from that low base. As a result, I think the timing is much more opportune now to look at acquisition opportunities, and we've been reserving our balance sheet effectively to be able to pursue acquisition opportunities without having to raise capital in -- which is currently very expensive, given our share price and small caps rating on the JSE.

Excellent. Thank you, Terry. Our next question is from [ Royce Wong ]. Have you been involved in the rebuild of damaged malls post the July riots?

Thanks, [ Royce ]. Yes, we have had some business coming out of it. And I believe we will still have a fairly significant business certainly replacing existing product that has been damaged. But yes, early repair work, yes, we were involved. And I think as the longer-term reconstruction of shop fronts and so on takes place, we will benefit from that as well. But bear in mind, commercial at this stage is not a big part of our South African business, commercial premises. But to that front, we are also looking to introduce some of our U.K.-focused commercial products into South Africa to take better advantage of the commercial opportunities that are emerging.

Thank you, Terry. Next question is from [ Bruce Anderson ]. Can you expand on your Israel business/operations?

Sorry, I didn't quite catch it. Was that Israel?

On the Israel business. Can you expand on your Israel business operations?

Thanks, [ Bruce ]. In Israel, we partner with an Israeli company, Trellidor Israel, and have partnered with them for well over 25 years. We have a royalty arrangement with our Trellidor Israel basis. So it's a fully-fledged manufacturer of Trellidor products. We share technology and we share designs of product through our partnership arrangement. And in return, we are -- we receive royalties from the Israel market. Israel is not showing growth, but it is a steady performer. For what is a very small population, the business outperforms. But in terms of our numbers, we receive a steady flow of royalties on an annual basis.

Thank you, Terry. [Operator Instructions] Currently, we've got no questions outstanding but we'll just give some time if there's any party that wish to raise any further questions. All right. Ladies and gents, that seems to be all the questions that's been posed. We thank you for your time today. And if you've got any further questions that you would like to ask the team, please don't hesitate to send it through to us by e-mail, and we'll get that answered for you. Have a great day. Thank you.