Trellidor Holdings Limited (TRL) Earnings Call Transcript & Summary

Okay. Good afternoon, all. Thank you for joining us for the Trellidor Interim Results presentation. Terry Dennison, CEO; and Damian Judge, CFO, will be taking us through the presentation, which will be followed by a Q&A session. [Operator Instructions] Without further due, Terry, over to you.

Good afternoon all, and thanks for joining us today. Thanks to you, Riaan and your team, again, for arranging the webinar for us, done it a few times now. So hopefully, we're getting practiced. So looking back, it was exactly 1 year ago today, when Patient Zero was diagnosed in KZN of COVID-19 disease, so thinking back over the last year, I don't know how the rest of you feel, but for me, it's been a real blend. So many of our norms have been challenged. I mean we're quite accustomed to running around wearing masks. In fact, I feel quite negative, I don't have a mask on, which is quite strange really. So as Trellidor, we're very grateful to have survived the hard lockdown of April, May and June last year and coming out of that with a strong balance sheet, which was very important for us to be able to take advantage of the very welcome and surprising support from the market that we've had pretty much since July of the year and our half year results certainly do reflect this journey. The unexpected level of support from the market seems to have also benefited other businesses that operate in the residential built environment, and we've seen some really good results coming through. And why is that? I mean our view is probably reflected in the other results releases that have taken place. But consumers have been spending much more time at home, and they're probably looking around in their homes, and they're saying, "We're not traveling, we're not spending money on leisure, so let's concentrate our spend at home." I think that definitely is the case. Interest rates are at a multi-decade low. I can't remember interest rates being as low as this, certainly in my active business life. And then home sales, particularly in the sub ZAR 3 million category, seem to be robust. Our view is that this is likely to continue given that we don't experience another hard lockdown in the short to medium term that is, which should benefit us going forward. So reflecting the degree of risk and uncertainty that we perceived in our weak economy, our strategic objectives set for 2021 were cash preservation and generation as a primary goal; focused on improving operational efficiencies and managing our costs within the group; enhancing our route to markets, in particular in South Africa, but also in this case in the U.K., primarily to facilitate growth and future-proof our business with changing trends and needs and consumer behavior; introduction of new products and to continue with our share buyback program. Our progress so far up to the half year from a cash generation has been excellent. It's been a standout for us with cash from operations up by 50% to ZAR 48 million, which is extremely pleasing and obviously reduces stress levels a lot in the business. To take special notes, our Taylor business, which has struggled in the last couple of years, improved their cash generation by 89% in the half year. Our focus on improving operational efficiencies and cost management. Gross profit has had some unusual pressures, probably primarily driven by rand-dollar in the early part of the half year and more lately of the commodity price increases that we see coming through in the world markets, but we've been able to maintain our gross margins through the half year period. And then I've already mentioned the operating expenses as a focus will have been very well managed decreasing 1.5% year-on-year, but this is after including certain one-off expenses on a restructuring program in Trellidor and business combinations coming in, which went in the comparative period of the prior year. With regard to introduction of new products, we have in our plans 4 new products which will be launched through half 2 2021, which is primarily to look at improving our market penetration in certain sectors, primarily being gated estates. We seek to continue with the share buyback program. We still regard the share price is significantly undervaluing our share price. But during the course -- sorry, I've lost my way a little bit. I see I skipped the slide, but I'll go back 1 after this. Since we started our share buyback program in financial year '18, we've repurchased 11.6 million shares, which have been canceled. During the first half of this year, a further 2.2 million or part of that was 2.2 million shares at an average price of ZAR 1.73, we've purchased and canceled. And in January '21, a further 1.3 million at an average price of ZAR 2.51 we've repurchased and canceled. But that leaves us with 96.7 million shares in issue. Going back to the slide that I skipped. Looking to enhance our route to market in South Africa and abroad to facilitate growth, we have, during the course of the past year, acquired franchise areas back in Durban and Johannesburg, which adds to the franchise area that we acquired some years back in Durbanville in Cape Town. The Durban and Joburg branches are now fully integrated, and the results have been excellent, particularly top line growth, which have increased by 27% year-on-year, which is unlocking opportunity for us when we see that we have possibly been sub-performing in those areas and that the market can support growth in the main centers, in particular. The acquisition of the Trellidor U.K. business was completed effective 31 October 2020 and performance for the half year is in line with our forecasts. Further details on that U.K. acquisition I disclosed in Note 2 of the results released booklet. So looking at our prospects going forward. Our sales in January and February are in line with prior year, slightly up in volumes, which is pleasing and showing a continuing trend. And then assuming our economy remains open and consumer confidence is sustained, we anticipate our sales to significantly exceed the prior year by year-end and that is obviously driven by the hard lockdowns that we experienced in 2020, which we don't anticipate will be repeated in this year. In the Trellidor owned and managed branches in our 3 of the major cities in South Africa, have shown very positive results, and we will be looking to increase and add areas to those branches as and when they become available. Our second half of the year will benefit from a full 6 months of performance from the U.K. business recently acquired, and that U.K. business has been part of the [ Trellidor stable ] in various formats, but more lately as a franchise for the last 25 years. Trellidor brand is well established in certain sectors of that market, and we view this branch as key to our growth in the U.K. and in time, possibly extending beyond the borders of the U.K. Product innovation remains key in our business. We need to stay ahead of trends and in line with market needs. And during the second half of the year, we'll be introducing the 4 products that I mentioned, 2 of which have already been launched and the final 2 will be launched during April and May of this year. Africa is still a major part of our strategy, and our African market has been harder hit than the South African market in half 1 comparatives, but we're certainly anticipating better performance through the remaining part of half 2 now that the land border closures have been relaxed and allowing the free flow of goods without the delays that we've been experiencing through the lockdown periods. In line with dividends, we've declared an interim dividend of ZAR 0.10 for the year, which is up year-on-year, and we're anticipating returning to our standard dividend policy for the full year. We also intend to continue on the share buyback program at -- certainly at the current share prices or similar, and we will apply excess cash to purchase shares back as the opportunities arise. I'd like to hand over now to Damian to take us through the numbers.

Thanks, Terry, and thanks to everyone for joining us this morning or this afternoon. To get into our financial overview. Our financial performance for the 6 months has improved from prior year, driven mainly by increased sales and excellent cost control in line with our cash conservation strategy. As a result, our earnings per share has increased 21.9% year-on-year. In terms of the table, the dividends paid line is showing a decrease in the period, which is as a result of the of COVID and the group strategy to only declare an interim dividend for [ F '20 ]. But as Terry has mentioned, we'll be -- we're aiming to get back to our normal dividend policy going forward. Also highlighted on this graph is the decrease in our weighted average shares, which is down to 99.3 million in December 2020 and as part of our buyback program. Top line has been resilient following the national lockdown and has exceeded our expectations. As a result, the group revenue is up [ 20.5% ] year-on-year. Our strategy, as Terry has mentioned, to directly manage franchises in the main centers has produced excellent results during the 6 months. The [ 27.5% ] increase in sales through these branched areas compared to a [ 1.5% ] increase by its peer group in the cities. EBITDA has increased and is up to ZAR 57.8 million from the F '20 and F '19 for the half year, again, getting back to our improved volumes in this tough economic conditions and the production over here and expense has been well managed. Focus on maintaining margins and tight overhead control will continue. We have included within the slide just a note on our prior year negative performance there, which is just highlighted by the impact of the national lockdown and the ZAR 37.4 million impairment of goodwill of Taylor, which was processed in the F '20 financial year. Debt to equity of 47% is up slightly from F '20, and this is driven mainly by the 12% decrease in equity as a result of the share buybacks and the prior year loss as an impact of the lockdown. Our interest cover is well managed, and our interest-bearing debt has decreased to ZAR 88.8 million from ZAR 99 million at the end of F '20. Working capital has been extremely well managed during the year. Our reduction in inventory is in line with the strategic objective to reduce our stockholding in Taylor, particularly, and it also includes the addition of the U.K. branch. And increase in receivables is in line with the increased trading through Q2 F '21. And I'd be very pleased with the performance of our debtors book coming out of COVID, a lot of uncertainty, and it really is a testament to the strength of our Trellidor network. So that's been really well received. And overall, we've got a net working capital slightly reduced, mainly driven again by the decrease in inventory. Cash conversion, as Terry has highlighted, has been excellent. The year -- the half year comparatives highlights the excellent improvement and the success of the cash of -- of our cash conservation strategy through the F '21 with cash from operating activities and free cash flow, up 50% and 49%, respectively, really a pleasing result in 6 months. Looking at our capital allocation strategy during the 6 months from a return on shareholders' perspective, the postponed interim dividends of ZAR 8 million was paid, and we also spent ZAR 3.5 million on share buybacks, which accounted for 2.2 million shares, an average price of ZAR 1.73, which have been canceled. From a debt servicing perspective, we've paid down our interest-bearing liabilities and also serviced our net interest of ZAR 3.5 million. From a CapEx, we spent ZAR 3.7 million, which is in line with our targeted spend and in line with depreciation of ZAR 3.9 million. In addition, we purchased the U.K. franchise. 100% of the shares in the U.K. franchise was acquired for ZAR 33 million. The purchase price net of cash is ZAR 17.5 million, ZAR 6.9 million was deployed from SA cash reserves to part fund the first purchase price installment. And then looking ahead to our second half of the year capital allocation, we will have a further ZAR 6.3 million that will be deployed for the second installment of this purchase. In addition, we've declared the interim dividend of ZAR 0.10 per share. No major CapEx is planned following an extensive CapEx program 2 years ago. And excess cash will be applied for share buybacks. Moving on to the Trellidor segments. Overall, revenues increased 3.5% across the Trellidor markets. main centers' contribution is up 2% to 38%, driven mainly by the 27% growth in the Trellidor branches, as mentioned earlier. Overall, the outlying regions continue to make the largest contribution to the sales for the Trellidor network. As we mentioned earlier in the presentation, sales into Africa has been -- has decreased year-on-year, driven mainly by the pressures of COVID. And this has had an impact on our product mix as that market is predominantly our traditional product, and so you have seen a slight decline in Trellidor traditional on this slide. It is pleasing to note the Clear Guard product has jumped in terms of its contribution from 12% to 15%. From a margin perspective in the Trellidor segments, we've seen an overall improvement in our percentage of cost to net sales. Wages have been well managed and include one-off restructuring costs. Materials have decreased from the prior year period following improved efficiencies, particularly in waste management, which has been very pleasing as a direct strategy that we've been working on over a couple of years. On the EBITDA line, we've had a nice increase and is up from F '20 levels, again driven mainly through the improved sales and well-managed overheads and expenses. What's especially pleasing is that we've also -- this includes the absorption of major branch in Durban and the U.K. as well as a smaller branch in Johannesburg. So this is really [indiscernible] to our cash conservation strategy. Moving on to our Taylor segment, which includes our NMC decorative molding business. Overall sales have increased 1.4%, driven mainly by a mass recovery in our [ Gauteng ] branch in the area. Pleasing to note that the work of pushing the Taylor products, particularly the blinds, through the Trellidor network has continued to show growth and is up 29% for the half year. The Western Cape, again, continues to be the major player in the Taylor business given its strong brand presence from start -- in terms of from where it began. The contribution of its aluminum shutters, which is really its bread spread and butter, has increased nicely in H1. It's so pleasing to note that our NMC business contribution, which had a nice bump from 12% to 15% during H2 F '20, continued with that contribution in H1 of this year. Group buying strategies have been implemented and savings were expected through the course of H1. However, the supply of raw materials from the East has been problematic due to knock-on effects of COVID. The delays have also negatively impact wages through increased working hours being required, but we do expect improvements in the Taylor factory process to bring our savings through H2. EBITDA has shown a nice increase from F '20 and F '19, and this has mainly been driven by the reduction in costs following our prior year restructuring program. Again, just on this slide on the graph, we just added the annotation around the performance and the impact of COVID and the impairment write-down. Going on to our additional information. We've included our summarized group cash flow, which just highlights our free cash flow of ZAR 47.4 million and our total cash reserves of ZAR 27.2 million as at the end of December, which takes into account ZAR 6.3 million of the outflow for the purchase of the U.K. branch, really an excellent performance, and against prior year, very, very strong. The group balance sheet is included as information, just giving some insights into the working capital structures and our old managed a strong balance sheet we have taken, which has served us well through the first 6 months of the year. And finally, on our performance, our earnings per share and headline calculation is detailed in the presentation. Again, we're really pleased to be reporting a healthy 22% increase in earnings per share for the 6 months. That brings us to the conclusion of the presentation. Back to you, Riaan.

Thank you, Damian. So we're going to move to Q&A now. [Operator Instructions] So the first question -- 2 questions, a similar flavor to it, so I'm going to read at once. So regarding the branches you've bought, you have mentioned growth of [ 37% ] top line, can you unpack how you achieved this growth? What did you do different to the franchisees to get this growth or what did the franchisee not do that you are doing now? How much more scope is there for the strategy to keep buying back franchisees?

Yes. Thanks, Riaan. I think, firstly, to answer that, it's a mixture of reasons. And 2 of 5 franchise areas that have been bought back in South Africa, and we'll just focus on South Africa. I think the question is, yes, it is focused on the South African Main Centre acquisitions. So 2 of the 5 areas that have been bought back in the last year were sub-performing areas. They were franchises that were either undercapitalized in their business or failing. So that was an easy turnaround, if you like, by recapitalizing and making sure we've got the correct personnel in those branches. The other 3 areas have been more surprising in that they've outperformed my expectations. And the changes that we've made are quite simply removing clutter from what is a small business in a franchise, a bit of scale coming in, which is creating an environment of competition for the salespeople, some pay structure changes for our sales staff. So going back to what Trellidor has always done in its retail outlets and that's clear line of sight of pay. Our salespeople are largely commission-driven. And the psychological factors of understanding what you're going to earn clearly from what you sell, has made a surprisingly large difference on their whole psyche and a turnaround in individual performance. A similar impact has flown through in the installation side of the business, which 1 good in-store, 1 good complete sale generally leads to another opportunity to do business through client referrals. So we're seeing that coming through strongly in the areas that we've bought back. And as I said, the sub-performing areas that were acquired, we expected a fundamentally better improvement. But 3 other areas acquired were what we regarded as being above-average franchises. So it certainly opened up our eyes to a degree to the opportunity that does lie in the main center. And there is scope for increasing the strategy. But at the same time, there's the risk of upsetting our existing channel, the existing franchisees, some of whom are excellent. And we want to keep excellent behavior, and we want to improve areas where there's opportunity to improve. But we are actively engaging with our network and where the opportunity arises, we will act on that opportunity in the main cities, not outside the main cities. This is primarily a metro strategy.

Thank you, Terry. Next question from [ Nick ]. Had Trelli had any approaches to take the business private again? The constant under-appreciation of the business [ by the market ] is frustrating.

Yes. Thanks, [ Nick ]. There have been various discussions that have taken place, some of which are or one of which has ended up at Board level. And it's something that the Board actively does consider on an approach-by-approach basis. And where the perceived value creation is right for shareholders, the Board will exercise its fiduciary duty to look after shareholder interests. So yes, there are discussions that are taking place, and I think that's inevitable certainly in the small-cap space. And our view is that the current share price significantly undervalues the company, which is why we will continue with our share buyback program, but it's a fluid environment. And the Board will consider shareholder wealth creation opportunities as and when they arise.

Thanks, Terry. And maybe a second question from [ Nick ] is also to add on to that, if not, as management considered accelerating the share buyback program, may be rather not pay dividends and rather just repurchase shares to return capital to shareholders?

We have considered it. Our viewpoint has been to remain conservative in uncertain times, but to continue with the dividend policy as we have in the past. So we are generating excess cash at the moment and that excess cash is being applied to buy shares back. We're not seeking to gear to buy shares back at this stage, but we do have opportunity in our balance sheet for gearing opportunities that may arise for other investment opportunities, which would need cash free. So we are looking at that area. But it is not our intent to curtail the share -- the dividend policy at this stage.

Thank you, Terry. Next question is from [indiscernible]. Good day, Damian. May you shed some light on the downward trend in the Taylor geo presence. Is this due to product/mix change as the demand in Blinds has come down?

Thanks very much for the question. The -- Taylor has always had a very strong presence in the Western Cape. And in terms of the market that it participates in regionally, there are strong players in each of the main centers. So the ability to grow into those areas has been challenging. The Trellidor network has definitely added to that and is now Taylor's biggest customer. And so that growth is growing. The possible downward trend that you're looking at is actually the impact in the Western Cape. In both businesses, we did see reduced performance compared to the other regions in the Western Cape. We think it's just cyclical. But that -- and should have some upside coming. In terms of the actual strategies, it's something that we are looking at constantly. So there's a new strategy -- revived strategies that we're looking at for the Taylor products and product set into KZN, an opportunity there, as well as the new product offering should be able to help us get into other markets. So yes, it is something that's high on the radar and we keep working on it.

Excellent. Thank you, Damian. Next question is from [ Paul ] [indiscernible]. Terry to you. In terms of the full year dividend, you're referring to going back the historical norms. Can you clarify that the FY -- full year dividend will have a catch-up element for the full year to be in line or you're only referring to the second half dividend?

Yes. Thanks, [ Paul ]. No, we're referring to the second half dividend. So we're not anticipating a catcher. And in essence, that will allow us to use the excess cash in either the share repurchase program or any other opportunities that may arise. But no, we're not looking at going back to prior year and catching up on a short pool. It refers to the second half or the final dividend for financial year '21.

Thank you. Next question is from [ Russell ] [indiscernible]. So given South Africa's requirement for retail security products, we expect demand to remain relatively inelastic. How do you propose to drive sales in [ Gauteng ] which seems to be an undercovered area?

Yes. Thanks, [ Russell ]. Yes, [ Gauteng ] has always been an interesting debate in our strategic sessions in our boardrooms. But in essence, [ Gauteng ] is probably the most competed market in the country with the most competitors centered in that market. So in terms of market share, we don't expect to achieve as higher market share as we believe we have in the other metros, in Cape Town and Durban. So that's the 1 issue. But the other issue, demand being relatively inelastic for security products, yes, I agree with that. but it is also driven by economic ability to purchase on products. So we do need some support. So [ Gauteng ] is a major focus, has been a major focus for the last number of years because we agree with your statement that we believe that there's a bigger upside, bigger market share opportunity in the [ Gauteng ] area. And it does receive a lot of our attention, but it is a highly competed market, more competitive than the others.

Excellent. Thank you, Terry. Next question is from [ Nick ]. Any update on the London underground opportunities?

Yes, London underground has gone quiet through this COVID time and the lockdowns. The U.K., in particular, has been more lately in the year has been very severely impacted by the lockdowns. But of late, we are now receiving quite a lot of inquiries and drawings and specifications and we're providing quotations, as we speak. So we are hopeful that, that building activity is going to accelerate again through this next year. But it has been quiet in the last year.

Thank you. Next question is from [ Keith ]. Can you touch on what new products are planning to be launched?

[ Keith ], thanks. I'll touch on the 2 that we've launched. And essentially, what we've done at their products variance of our existing products. One of the ones we've launched is a lighter security plantation shutter type business, louvre shutter product, which is driven primarily for the gated communities where security requirements are lower. And both businesses are planning on launching or Trellidor has launched one and Taylor will be launching their version in the next month or 2. That's a lower price point product. So it's to deal with competition as well, but recognizing customer need in a lower security environment. The other product set, which has been launched is focused out of our U.K. markets in particular, which is a roller shutter with some really neat innovations that make it incredibly strong from an attack point of view. And we've launched that now into the South African market from the lessons we've learned in the U.K. market. So that is for a higher security environment, still [ an strategically ] pleasing product which will have a niche opportunity, we believe, in unlocking, hopefully some new markets for us.

Thank you, Terry. All right. Let's get a little bit more time for any further questions to be asked. Maybe to reiterate while we wait, this presentation is also levered on to the Trellidor website. Right, guys, seeing there's no further questions, thank you very much for your time, and have a good day. Thank you.