Trellidor Holdings Limited (TRL) Earnings Call Transcript & Summary

Good morning, all. Thank you for joining us today for our Final Results Presentation for the Year Ended 30th of June 2023. Thank you to Vera Kleynhans and team at PSG Capital for setting out this webinar. The operating environment for the group remained challenging throughout F '23. In South Africa, disposable income is under pressure. With load shedding at a peak and increasing challenges with municipal water delivery, there's been a significant increase in competing priorities for available household budget. Where security was previously top of mind for households in South Africa, this is not necessarily the case in the current environment. In addition, the subdued residential property market has also had a negative impact on the sales of Trellidor's products. Subdued demand in F '23 from the U.K. retail sector has also impacted results, although strong growth in Africa has offset this performance to a degree. The current high interest rates and inflation add to the economic pressure but with stabilized input prices and interest rates close to a peak, we should hopefully see an improvement to the operating environment in the foreseeable future. Revenue was under pressure and was down to ZAR 502 million in F '23 from ZAR 513 million in F '22. Strong sales in Africa offset declines in South Africa and the U.K. to show a small growth for the Trellidor business in the year. NMC also showed a small growth in revenue but Taylor declined by 9.6% through F '23. Gross profit margin remained stable. Improved margins in Taylor and NMC were offset by weaker margins in the Trellidor business. HEPS returned ZAR 0.042 per share in F '23 compared to ZAR 0.004 per share in F '22. We must, however, remember that the F '22 year included the provision for the Labour Appeal Court back pay order for 42 employees, which had an impact of circa ZAR 0.246 per share in F '22. Cash from operations was stable at ZAR 39 million despite the challenges faced. Our strategic objectives for F '23 and the progress made on them is as follows: Focus on rebuilding our franchise selling capacity. Sales consultants have been actively recruited in the main centers with additional heads being added in Cape Town and Johannesburg during F '23. Trellidor has also completed its initial Sales Internship program and 5 graduates have been absorbed into the 3 branches during F '24 quarter 1. Driving Trellidor's recovery in the African market sector, we've had excellent results through F '23 with sales into Africa increased by 32% from F '22. The Trellidor International team has been remanned and is being led by an experienced sales and marketing executive. As a result of the increased internal capacity, additional franchises in new areas are being actively pursued. Recruitment of additional selling resources in Trellidor U.K. The U.K. operation has been focused on expanding its customer base, both commercially into small business and also into the residential sector. Listing as a preferred supplier has been achieved with 2 new retail chains with the first orders received through half 2 of F '23. The successful pilot digital advertising campaign has yielded encouraging results with sales to the small business and residential markets being achieved. To ensure we maintain our service levels and prepare for future growth, additional selling and installation resources have been hired. Sales to existing customers were, however, slow in the period, with project type work being delayed due to alternate priorities. Reactive work, which is in response to crime has, however, been robust. Significant orders for project type work have since been received during F '24 quarter 1, and the team is well equipped to fulfill these orders following our investments in resources through F '23. Moving on to Taylor. Rebuilding the fundamentals of the Taylor business. The new management structure was fully populated during F '23 half 1 and the results through the rest of F '23 are very encouraging. Despite softer revenue, gross profit margins have improved by 3.9% to 28.9%, which compares to an F '22 of 25%. Overheads have been well managed and have decreased 9% year-on-year. As a result, EBITDA has increased to ZAR 11.8 million from an F '22 results of ZAR 2.9 million. Introducing new products, focusing on expanding our product offering into the commercial property space in South Africa. The first sectional door product, Coroview was launched during F '23. This specific product is targeted at the automotive and emergency service industries. The second sectional door product, Corosteel, which will be launched through F '24, will be marketed primarily to warehousing and industrial applications. During F '23, Trellidor also launched a new traditional Trellidor range as well as the new security mesh screen product. The prospects for the group are mixed with the subdued South African economy offset by better environment abroad. Our sales in July and August are marginally ahead of prior year, although demand remains subdued locally. Trellidor's U.K. business has been awarded a significant contract to manufacture security products through to Q3 F '24 and has already started supplying against orders received. Trellidor is focused on margin improvement through F '24 to continue the work done early in F '23. Market segmentation in South Africa will continue with an established B2B business-to-business team in each of the main centers targeting the commercial and retail sectors. The group will also continue to focus on rebuilding the franchise selling capacity in South Africa through economic support and investment in training facilities and material. Except for Corosteel, no new products are anticipated to be launched through F '24, and the focus will rather be on bedding down the products recently introduced. The Trellidor owned and managed branches in 3 of the major cities in South Africa continue to show positive results. The further acquisition of one of the Cape Town franchises, namely Milnerton, was executed in July 2023, and we'll provide additional scale. In response to the subdued local economy, cost control is a priority. Taylor's management team, having reestablished the fundamentals of the business, will be focused on -- focusing on incremental market share growth through increased brand visibility, active engagement, support, lead allocation and training with the trade network through F '24. The executive team are also focused on materially reducing the Group's debt levels by the end of F '25 to reduce the interest and debt servicing burden. I'll now hand over to Damian Judge to take us through the financials. Thanks, Damian.

Thanks, Terry. And again, thanks to PSG for hosting us today. Good morning, everyone, and thanks for joining us. As Terry has already touched on, F '23, in particular, the second half of the year has been extremely challenging across all the business units. As a result, group revenue for the year has decreased 2.1% against last year. In the Trellidor business unit, which is 0.9% up on the 12 months has seen an exceptional recovery in sales into the rest of Africa, which is 32% up year-on-year. But these gains have unfortunately been offset by weak trading conditions in RSA and reduced project demand in the U.K. Taylor, whose market is largely concentrated in the Western Cape and Gauteng, has also struggled as a result of its reliance on the RSA market with turnover backwards 9.6%. Both Gauteng and the Western Cape have been significantly impacted by load shedding and the limited consumer disposable spend that is available has been prioritized in response to that. For the NMC business unit, they have benefited from an increase in project type work in the Western Cape and Durban, although the lower demand in Gauteng has limited the gains to only 3.5% increase over the period. As noted earlier, it is really pleasing to see our growth in the rest of Africa over the 12 months as this has been a key focus area for the management team, and they have been rewarded with a solid set of results. In RSA, the pressure on consumers and the prioritization of spend towards alternative electricity and water supply has resulted in sales being backwards 2.4% when compared to F '22. Our focus, however, on the retail and commercial sector is starting to gain traction with its contribution to RSA sales increasing from 0.3% in F '22 to 1.8% in F '23. In the U.K., the revenue decline of circa 19% in pound sterling is a result of reduced project type spend in the retail sector. We do, however, have line of sight of increased project work through F '24, which we're looking forward to fulfilling. The Western Cape continues to dominate Taylor's geographical contribution of sales, although there has been a 4.5% decline in sales against the previous period. Gauteng's contribution has reduced from 19% as at F '22 to 14% at the end of June 2023. Reversing the decline in Gauteng is a key focus area for Taylor's management team in F '24. Sales of the NMC product range in Cape Town have increased 41% during the year as a result of increased project work. Durban's contribution has also increased from F '22, with a major negative impact on top line coming from demand in Johannesburg with sales from the region decreasing 9.8% year-on-year. Driven by the increased demand in the rest of Africa, sales of the traditional Trellidor product sets have increased 9% from F '22. The contribution of roller shutters during the period declined from 13% to 7% as a result of the reduced demand for project work from our major U.K. customer. We do however, as I mentioned earlier, have line of sight of this improving through F '24. The product mix contribution in Taylor has remained largely consistent with the exception of the Venetian Blind product range, which is up 30% when compared to the same period last year on the back of some project we have secured by the team. NMC's cornice range, Nomastyl, remains the largest contributor to sales, although this declined from 64% in the prior year, and the space has been taken up by the skirting range, Floorstyle. This trend of skirting cells growing is in line with the global trends in this range of products, although the decline in cornice sales is compounded by a weaker demand in Gauteng. In addition to the key focus area of regaining market share through Africa, another key challenge that was set was a recovery in margin following the significant increases in raw material and supply chain costs in the post-COVID world. At half year, all the businesses were tracking ahead of prior year levels and although the second half was challenging, Taylor and NMC finished F '23 with improved gross margins. Taylor through the interventions of the new management team have improved gross profit margins by 4% versus F '22 despite the decline in revenue. A strong base has now been established and the business is well set to benefit from top line support by regaining market share, particularly in the Gauteng region. NMC's gross profit margin has improved from 43% to 44% on the back of increased selling prices in response to input costs from Belgium. Softer top line through F '23 H2 has, however, reduced the recoverability of fixed and semi-variable costs, specifically in Trellidor. As a result of reduced sales and the increased wage will post the reinstatement, gross profit margins in Trellidor have declined from 44% to 42%. With raw material costs anticipated to stabilize over the remainder of the financial period, Trellidor will be implementing a strategic product and price repositioning to improve gross margins in a challenging economic environment. The group finished the year behind F 22's EBITDA after adjusting for the Labour Appeal Court provision. The key drivers for the decline have been the under-recovery of fixed and semi-variable costs as a result of the softer top line across all 3 business units. We are reporting operating expenditure for the Group to have increased by circa 9% year-on-year, against the backdrop of inflationary increases, adding the overheads of 2 new RSA franchises, being the Southern suburbs in Cape Town and Hillcrest and Durban and the investments in selling capacity. Our selling capacity investment has been targeted at the U.K. as we continue to grow our customer base in country. Closer to home, our investment in selling capacity in the B2B is starting to show results, and we are expanding our sales force in our [indiscernible] branch. The investment in selling capacity through F '23 is anticipated to yield growth in F '24, particularly in the U.K. Despite the overall decline, the results from Taylor have been very pleasing. In response to the weaker top line, the new management team in Taylor have responded by reducing overheads by 9% over the period. In addition to the gross profit margin, Taylor's EBITDA has improved by ZAR 8.9 million to ZAR 11.8 million, excluding any gains from the repositioning of NMC as a stand-alone entity, which took place during the year. With the improvement in Taylor, the manufacture and supply contract in the U.K., Trellidor's product and price repositioning and the general management of overheads in line with inflation post our investment in selling capacity during F '23, the group is well placed for improved EBITDA results through F '24. In summary of the financial performance for the Group for the 12 months to 30 June 2023, top line was under pressure, mainly as a result of continued consumer spending constraints in RSA, the need to divert whatever spending is available towards electricity and water security in the short to medium term and the redirect of project-related spend in the U.K. Our recovery strategy into the rest of Africa has yielded exceptional results. And although our materials consumed percentage has improved, the under-recovery of fixed and semi-variable costs has hampered any improvement in our gross margin during the year. In addition to the growth in Africa, the stabilization and turnaround in Taylor in terms of its EBITDA return is very encouraging, thanks to the efforts of the new management team. Coupled to the operating pressure, we have had to take on additional debt in response to the Labour Court judgment at a time when we are in our interest rate hiking cycle, which is added to our interest bill. The increase in debt levels and interest rates means our interest bill has increased 81% from F '22. A material reduction in debt levels is, therefore, a key focus for the group over the next 12 to 24 months. As has already been communicated through the short form announcement this morning, we are reporting earnings per share of ZAR 0.037 per share and headline earnings of ZAR 0.042. Although significantly up against prior year, given the impact of the Labour Appeal Court judgment, prior year is certainly not the benchmark we have set for ourselves as an executive management team. Trending back to historic levels is therefore, a key focus area for the group looking ahead to the next 12 to 24 months. The decrease in EBITDA and the increased levels of debt and interest has resulted in the Group breaching 2 covenants as of the 30th of June 2023 in terms of our debt facility agreements with our lender. As part of our ongoing communication with our lender, our operational and performance plans for the next 12 to 24 months have been presented to them. Together with the signed annual financial statements, which they have now received, they will conduct their annual review and assess the significance of the breaches. As per their guidance, there are several other factors that they consider in addition to the breaches when determine whether or not it is material and will have an adverse effect on our facilities. On assessment of the additional factors, which are detailed in the long-form announcement, the Board is confident that the breaches will not have a material effect on the group and its ability to continue as a going concern. To support this, the plans that have already been implemented in F '24 will rectify the breaches. Getting into the financial position of the group as at 30th of June 2023. As a result of the Labour Court judgment, ZAR 32 million in debt was added to the balance sheet during the year. The increase in debt reduced financial performance and the increase in interest rates over the last 12 months has resulted in our interest cover reducing from 7.7x as of 30 June 2022 to 2.2x at the close of this year. The increased debt levels and interest rates, coupled with the challenging and uncertain economic climate in South Africa supports the group's plans to materially reduce debt over the coming months. The start of F '22 H2 last year was a challenging one for Taylor and NMC. As a result of stock-outs as China's zero COVID policy and the start of the Ukraine conflict added additional pressure to the global supply chain. In response and to avoid a repeat out of costly stock-outs experienced, both businesses have increased their stockholding at the end of F '23 H1. Although levels have not returned to in line with F '22 by the end of the year, ZAR 7.7 million was released during H2. Maintaining stock levels in line with demand remains a key focus area for all the business units but given the embedded price increases of raw materials, which we are still feeling being 69% for steel and 36% in aluminum. When we look at pre-COVID pricing, we don't expect returning to pre-COVID levels in terms of stockholding value. Debtors and creditors remain well managed across the group. And overall, our investment in net working capital declined to circa ZAR 8 million in F '23 from circa ZAR 25 million in the prior year. Despite the below par financial performance, the group made incremental improvement on cash generation from the prior year, primarily as a result of reduced investments in net working capital. These gains were largely offset by circa ZAR 7.2 million increase in finance costs, including IFRS 16 during the year. Free cash flow has also improved marginally from F '22 but we remain significantly behind historic levels. Unlocking cash generation is a focus for the executive team and our performance plans for F '24 will support this strategy. The increased debt levels and interest rates has absorbed a significant amount of free cash flow during the year. As a result, reducing debt levels, as previously mentioned, is a key focus area going forward. CapEx in F '23 was out of the ordinary with the purchase of the Cape Town showroom. Looking ahead to F '24, CapEx spend will be maintained within depreciation levels. Following the completion of the acquisition of the Hillcrest franchise during F '23, the Milnerton franchise was added to Cape Town during F '24 Q1. We now have repurchased 4 franchise areas in each of the main centers. As we have applied consistently since embarking on the franchise repurchase strategy, any future acquisitions will be on a -- on the willing buyer, willing seller principle. A final dividend has not been declared for the year given the operating environment and financial performance of the group. Once gearing has stabilized, consideration will be given by the Board as to the utilization of excess cash to either be applied to share buybacks and the payment of the dividend after investment and growth opportunities that achieve the group's target to return on invested capital have been assessed. In terms of our financial position, it is important to highlight the debt classification of noncurrent and current in this financial statements this year. As a result of the covenant breaches highlighted earlier, the accounting standards, in particular, IAS 1 Presentation of Financial Statements require that the related debt be classified as current unless a waiver of the breach had been received from the lender before year-end. Post COVID, this particular accounting standard has received a lot of attention, and therefore, we have been very diligent in applying its requirements, taking into account our covenants. Our covenants are only formally assessed by on receipt of signed financials by a lender. And therefore, as at year-end, the significance of the breaches had not been assessed. This creates a timing difference between the practical application of our facility agreement and the accounting standards. As a result, and although our loans are noncurrent and are being serviced as such, the accounting standards require that they be classified as current liabilities. Once the breach is condoned, the loans will be reclassified as noncurrent for accounting purposes in line with how they are currently being serviced. As stated earlier, the lender has received our annual financial statements as well as our performance and operational plans for the next 12 to 24 months, and we'll be conducting their assessment on our facility in due course. The outcome of their assessment will be communicated to the market via [indiscernible] as soon as it is available. Thank you again for joining us this morning, and I'll now hand back to Vera.