Trellidor Holdings Limited (TRL) Earnings Call Transcript & Summary

Good morning, and welcome to the Trellidor Holdings Limited results presentation for the half year ended 31 December 2023. The presentation will start with an introduction by Kevin Hodgson, the recently appointed Independent Nonexecutive Chairperson of Trellidor; whereafter Terry Dennison, the Group CEO, will provide an operational overview of the business for the 6-month period; followed by an overview of the interim financial results, which were published on SENS earlier this morning by Damian Judge, the Group CFO. After the presentation, there will be a Q&A session during which Terry and Damian will be available to answer your questions. [Operator Instructions] A copy of the presentation is also available on Trellidor's website. And a recording of this webinar will be made available on the website in due course. So thanks again to everyone for joining us. And on that note, I'm going to hand over to the Trellidor team.

Good morning, and welcome to the Trellidor Interim Results Presentation for the 6 months ended 31 December 2023. My name is Kevin Hodgson, and in December last year, I was appointed to the Board as Independent Chairman. Since its listing in 2015, we recognized that the company has disappointed shareholders. Whilst the general economic environment, coupled with the effects of the COVID pandemic, have not created a fertile trading environment for the business, certain decisions made over the past decade regarding the deployment of capital have resulted in the company carrying an excessive level of debt, the effect of which has resulted in a disappointing return for shareholders over the period. The executive management of the business will shortly provide you with further clarity as to the challenges and opportunities facing the business, but the good news is that the Board and management are completely aligned with what needs to be done. Over to you, Terry.

Thank you, Kevin. And thank you, Vera Kleynhans and the team at PSG Capital for setting up this webinar. And of course, thank you to you all for joining us in this webinar today. Market domestically remains weak and has been for some time now. Our interest rates and constrained disposable income drives consumers to focus on necessities for spend. Supply chain challenges still exist, exacerbated by the severe port delays we've seen from October 2023. Lead times as a result for imports are extended. Metal prices remain at high levels, but have stabilized. With the elections in South Africa scheduled for May, we can expect some consumer uncertainty going forward. And just further information, the metal industries wage negotiations are scheduled to commence around midyear 2024. On the brighter side, it seems that interest rates may start to ease in the second half of the year, together with easing inflation, and this should bring some relief to the consumer. Activity in the Durban port container terminal, with the public-private partnerships announced recently, should see port delays improving. We have already seen some improvements recently. On to our salient features for the period. Revenue grew 6.9% to ZAR 292.2 million despite subdued demand domestically. Operating profit margin declined to 12.3% from 13.1%, due primarily to lower volumes through the South African factories not fully recovering semi-fixed costs and overheads. Headline earnings per share ZAR 0.214 compares to ZAR 0.255 in the corresponding prior period, increased interest costs due to higher rates and higher opening debt levels are the main reason for this. Cash from operations was a healthy ZAR 39.5 million, and the group's net debt position improved to ZAR 116.8 million. The key challenges faced by the group in the period were as follows: Declining revenue in the domestic market, and our high opening debt levels at higher interest rates. In response, the following was achieved: Revenue from international markets improved to ZAR 82.4 million, representing 28.2% of the group's revenue for the period. And our net debt position of ZAR 116.8 million at the end of December 2023 compares to the comparative period of ZAR 140.3 million and a June 2023 level of ZAR 146.7 million. This is an improvement of ZAR 30 million from the end of June 2023, which has been aided by prudent working capital management. We recognize that the domestic market will continue to face macroeconomic challenges going forward. And accordingly, our strategies remain focused on the following: restructuring and optimally reducing the current level of debt in the group, further improving working capital management, rigorous cost control, optimizing revenue generation domestically, and leveraging revenue growth opportunities abroad. I will now hand you over to Damian Judge, our CFO, to take you through the numbers in more detail. Thank you.

Thank you, Terry. And thanks again to Vera and the team from PSG for hosting us. A warm welcome to everyone that has joined us on the call, and I'm looking forward to sharing our results with you this morning. We'll start by taking a look at the group's overall financial performance for the 6 months. Revenue was up 6.9% to ZAR 292.3 million. Operating profit up 0.5% to ZAR 36.1 million, and HEPS was down 16.1% to ZAR 0.214. We had a strong performance from our international divisions from a top line perspective, although this was unfortunately offset by a weaker demand in South Africa. Operating profit margin decreased to 12.3%, driven by the under-recovery of semi-fixed and fixed costs because of lower volumes from the domestic markets. Headline earnings and earnings per share declined 16.1% on the back of increased interest costs. From a segmental analysis perspective, the Trellidor business unit has contributed 70% to the group's turnover. This is up from 64% in F '23 driven mainly by the increased sales through the international divisions over the period. Both Taylor and NMC have given up ground over that period to Trellidor's contribution. The picture is very similar at an operating profit level, with Trellidor increasing its contribution from 73% to 83% and the other two dropping their contribution as a result. In line with the trend of contribution from the Trellidor business unit, we can see that our security products have followed a similar trend, increasing their contribution from 65% to 70% in F '24 for the 6 months. The growth in our international division is highlighted in our geographical source segment analysis, with our Rest of Africa and Rest of World increasing their percentage of contribution from 11% in F '23 to 28% in F '24. Taking a closer look at the segment's performance, starting with the Trellidor business unit. Trellidor is reporting revenue up 14.6% to ZAR 204 million for the 6 months, operating profit up 3.3% to ZAR 27.7 million, with operating margin down to 13.6% from 15.6% in the comparative period. As stated already, we've had strong performance from our international divisions, but this was significantly offset by weaker demand in South Africa. Disappointingly, operating profit only increased by 3.3%, primarily as a result of the lower volumes through the factory in South Africa. In terms of Taylor's financial performance, revenue is down 11.5% to ZAR 73.8 million. Operating profit has also declined to ZAR 4.8 million, and our operating margin is down from 8.6% to 6.5%. Also linked to the South African economy, demand in the market for Taylor's decorative products was muted over the period. Reduced demand negatively impacted operating profit due to the under-recovery of fixed and semi-variable costs. In line with Taylor's performance, NMC's financial performance has also been negatively impacted by reduced demand. Revenues declined 14.9% to ZAR 15.2 million, operating profit at ZAR 1 million and operating margins of 6.6% from 17.8%. This operation has been significantly impacted by the Gauteng region, which has seen the largest drop in demand over the period. Taking a look at the group's financial position as at the 31st of December 2023. Net debt is down 16.8% to ZAR 116.8 million. Net working capital is at ZAR 107.5 million, which is down 24.7%, and cash from operations has increased 465.3% to ZAR 39.5 million. We will unpack some of those numbers in a bit more detail shortly, but I just wanted to take this opportunity to reemphasize the SENS announcement, which was distributed on the 16th of November 2023, which advised shareholders that the primary lender had condoned the covenant breaches reported in our year-end results 2023. As explained in the SENS, no amendments to the existing financial covenants or any additional covenants or conditions were imposed or implemented by the lender. We have also made significant progress in reducing the net debt levels, although these debt levels have not yet normalized, and as a result, the Board has taken a decision not to declare an interim dividend. As highlighted earlier, following the results of F '23, the group has spent a lot of time focusing on its balance sheet and, in particular, its net debt situation. As you can see from the graph, it's very pleasing to report a really strong reduction in debt over the 6 months. We have shifted from circa 70% debt-to-equity ratio as at F '23 full year to circa 58% at the end of December 2023, which is more in line with our F '22 levels, which were also around the 58%. So this has been a very strong performance by the group over the 6 months, and there is line of sight for this trend to continue. Taking a look at a second key focus area for our balance sheet over the last 6 months, being our investment in net working capital, and again, we've seen some pleasing results through the period. In particular, our stock levels, which have been fairly sticky over the last couple of reporting periods in response to higher pricing and logistical challenges, have started to steadily come down from December 2022 levels and where we find ourselves now at ZAR 115.8 million. This is a comparative to our December '21 levels has also declined against those. So a lot of hard work, specifically in the Taylor business has gone into stock management, and we're finally starting to see some of that hard work bear fruit in this reporting period. From a summarized cash flow perspective, it's very pleasing to get back to reporting on this graph after a couple of challenging periods. It's clear that we can see that we're moving back towards our F '21 levels, which is very, very pleasing. And the contribution of the free cash flow generation has been from both the Taylor and Trellidor business units over the period. Before I hand over to Vera for questions and answers, we have included in our appendix, at the end of this presentation, a detailed income statement, earnings per share calculation, statement of financial position and detailed cash flow statements, which complements the long-form announcements, which has been released on our website this morning. Thank you very much. Over to you, Vera.

Thanks, Terry and Damian. So far, we've only received one question. [Operator Instructions] The question we received is from Craig Butters, and it's says, congratulations on the significant release of working capital and debt reduction. This is often a consequence of slowing growth. So to what extent do you believe this is sufficiently sustainable to address the covenant review post June 2024, and thereby avoid the sale and leaseback, which, as you are aware, I believe, should be avoided? What other options have you considered?

Thanks, Vera, and morning, Craig. Thanks for the question. Yes, from a -- looking ahead to the covenants at the end of the year, we are well on track to meet those. We've got quite clear line of sight from that perspective. And that has brought us some time to reengage with our lenders in terms of our debt and our debt structure. And so for now, the sale and leaseback has been put on pause, not off the table, but on pause while we're in advance stages with our bankers to talk about a restructuring of the debt, which we'll hopefully be able to conclude before the end of the financial, and then communicate through to shareholders.

Thanks, Damian. Next question from Paul, which says, the U.K. contribution is very pleasing after many years of promise. Are you able to provide us with the operating margin comparison on your U.K. sales against your SA margins?

Paul, Terry here. Thanks for that question. Yes. I think in terms of the U.K., you're quite right. There's many, many years of mining of relationships and building reputation and providing top grade security solutions, various security solutions to protect assets in the country, and those relationships are starting to pay off. In terms of margins, without giving absolute percentages, but the margins are designed to be similar, but we do have a small factory in the U.K., and that factory operates on margins that are similar to the Trellidor factory for the products that are primarily produced in the U.K. There are products that are partially manufactured in South Africa, exported to the U.K. and finished in the U.K., the margins on those products, the traditional grill product, in particular, are slightly lower out of the U.K. factory than in South Africa.

Thanks, Terry. And then two questions along the same lines from Neil Brown and [indiscernible], which relates to the U.K. growth. And basically, the questions are whether the growth is mainly due to 1 large contract or if it's a more general improvement? And whether the U.K. sales are sustainable, and maybe you can provide clarity on the concentration of the U.K. client base?

Yes. Neil, that the work that we're getting in the U.K. now is based on the foundations that we've been building over the last number of years. Those relationships are gradually growing. It takes time to build these relationships. It's not easy. So we are increasing our customer base all the time. This particular period is dominated by a customer that's coming through in the first half of the year. But we do have line of sight to the broadening of the base, and we're going to continue working on those relationships to spread the market base, which is a clear strategy in the U.K. is to broaden our base of nonresidential type work, which is bigger corporates and so on. And we now have several on our books.

Thank you, Terry. Next question is from Chris Logan. The second half of FY '23 took the market by surprise with a negative ZAR 0.22 per share. He's asking whether you can advise what was behind the surprise and [ just saying ] , potentially, it was pricing? Whether there are any assurances that there will be no further negative surprises like this? So Terry, I don't know if we've got a magic ball to see whether there are any potential surprises going forward?

Thanks, Chris. A nice easy question to answer. I think we all know that the market we're dealing with -- the domestic market we're dealing with is uncertain. So from a demand perspective and so on, I think we can expect the weak conditions to continue with the added uncertainty of elections at the end of May. So the crystal ball is very murky. I'm sure you'll appreciate. Our focus is to optimize whatever revenue opportunities there are in the domestic market and to continue mining our relationships that we've developed internationally. So hopefully, that will create a softening of the blow from last year. There were some elements of pricing in the previous period. Those have been addressed to the extent that that's possible in the weak market. So we're not anticipating a repeat of internal strategies not firing in the second half of the year. A lot of hard work has gone into it, but it's true to say that the market is uncertain.

Thanks, Terry. A question from David asking whether you can -- whether you're able to give a sense of where the Board is thinking in terms of the disposal of Taylor? And if so, where you are in this process?

Thanks, David. Terry, again. Essentially, nothing's off the table in the group. We are looking at all of our assets. We have had a look at our sale and leaseback. And on the properties, and this is all with regard to reducing the debt level in the business. At this stage, we've been able to put the sale and leaseback on hold, and hopefully, we'll not need to foresee that opportunity due to the work we're doing on our balance sheet currently and the release that we're seeing in the working capital, which is providing us some headroom in this regard. With regard to Taylor, Taylor remains part of the group as we speak. And the management team at Taylor are working very hard on their strategic objectives, which include releasing cash from working capital. So just to reemphasize, nothing is off the table. We recognize the market weak, we recognize where we are in the market, and we're keeping all of our options open.

Thanks, Terry. And two quite similar questions from Neil and [indiscernible] regarding the market share. Firstly, asking whether you have done an analysis of your position relative to your competition in SA? And whether you're gaining or losing market share or holding your own? And then similarly, whether the decline in Taylor and NMC's top line is a function of a shrinking market or rather a loss of market share?

[indiscernible], thanks for that question. Terry, again. It is difficult to analyze the market and market share, and I've said that in the past. We are noticing that some of the smaller players that have entered, what we call, the lifestyle side of the security markets seem to be struggling, and a few of them have closed their doors. And the bigger players all remain in the market. And I think one indicator of stress on the market is the amount of voice that you see in the media with regard to above-the-line advertising, which has definitely reduced through this period. So I think the industry is seeing the pain. We can see it geographically, some parts of the country are faring better than other parts. Western Cape and the Southern Cape, I don't think there's any great secret is probably showing a stronger growth opportunities in the market, but the mining areas, KZN, in particular, are weak at this stage. So I think the industry is seeing what we are seeing. With regard to Taylor, the top line, there is an element there of internal pressure on turnover, and it's to do with the strategy of cleaning up our sales book and correcting the margins in some of the distribution relationships that we've had in the past with Taylor. And that has led to some resistance from the distributors affected. And that -- there's no doubt in my mind that, that has had a downward pressure on the Taylor to another. But that has past us now, and part of our strategy is on rebuilding that distributor market on new terms and conditions that have suitable margins to support the business. And in the case of NMC, which is a very, very vanilla construction materials business. It supplies cornices and skirtings primarily with some decorative products to the building industry. So it relies on construction and construction projects and finishing of buildings for its demand. And there's no question that, that has been very quiet, and over this period, particularly in the Gauteng market, where a large number of our customers that are big developers slowed their building work down considerably. So that NMC is definitely a function of the market.

Thanks, Terry. And another question from Paul regarding the SA operations, which is clearly showing volume declines. He is asking whether you can quantify those declines, and which measures are being implemented to address those?

Paul, Damian here. Thanks for the question. So I think from a South African perspective, the -- we released the results of Taylor's decline in revenue of around 11.5%, and I think that gives you a good sense of where the SA market is. And in terms of how we're responding as per the presentation, we really are focusing now on cost controls where possible, and then as well as looking to optimize that network as best possible through training interventions, et cetera. I think it's no secret that home improvement sector is under massive pressure in the country, and we're not immune to that. So we are working really, really hard at upliftment of the team, cost controls, and then making sure that we -- any opportunities we get, we respond accordingly.

Thanks, Damian. Question from Craig regarding Taylor, any the initial signs seen in Taylor's margins due to cost control appears to have lost momentum. Can you expand on the reasons above and beyond the [ media ] demand for this, and where the further steps are required?

Craig, Terry again. Yes, the Taylor business has undergone some good medicine over the last sort of 18-month period. There has been cost -- overall cost reduction in that business. But more importantly, there's been a very big focus on the margins of the business. And bearing in mind that is a manufacturing business. So you do have semi variables and fixed costs, which are impacted when turnover is under pressure, and that does have the impact of dropping the margins. But in terms of our pricing policies and our recovery of our absolute variables, and the business is in good shape. And a lot of good work has been done. And we've seen stability in those margins for a good -- over the last 12 months or so, the stability has been cemented. So the work that is currently being focused on is to maintain those levels, to look at our working capital. We do believe we've got some room to improve further, and particularly in inventory. And then it's top line for us. So rebuilding -- as I mentioned earlier, rebuilding the turnover base through the distribution network at the new terms and conditions that have been negotiated and put in place with these distributors, which also are supportive to margin.

Thanks, Terry. [Operator Instructions]. David, I can see you've got a question for the non-execs and the rest of the Board. We will pass that on to them and get them to respond to you. They're not actually currently on the Q&A. But if there's any other questions, I'll give it another minute, and please submit those. And if not, and that's it, then we'd just like to thank Terry and Damian for their time and making themselves available. And all of the shareholders and investors who joined us this morning, thank you very, very much.