Trellidor Holdings Limited (TRL) Earnings Call Transcript & Summary

Good afternoon all, and welcome to the Trellidor Holdings Limited Annual Results Presentation for the financial year ended 30 June 2024. Thank you to all the shareholders and investors for joining us this afternoon. We will start with an operational overview by Terry Dennison, the Trellidor Group Chief Executive Officer, which will be followed by a review of the financial results presented by Damian Judge, the Group Chief Financial Officer. After the presentation, Terry and Damian will take your questions, which you can submit on the Q&A tab on the Zoom platform at any time during or after the presentation. As always, a copy and recording of the webinar will also be made available on the Trellidor website. And with that, I'm going to hand over to Terry.

Thank you, Vera, and thanks to the team from PSG Capital for setting up the webinar. Good afternoon, and welcome. Thank you for joining us today. Looking at the domestic market. The market domestically remains weak with high interest rates and constrained disposable income dampening demand. Supply chain challenges still do exist, but seem to have stabilized. Port performance has improved and has the momentum to improve further. Import lead times, however, remain extended, and this puts pressure on inventory levels. Metal prices seem to have peaked, and we are now starting to see some reduction in metal prices on our forward orders. Wage negotiations in the metal industry were successfully concluded in May 2024 without any industrial action. The agreement is for a new 3-year term to June 2027. And looking at some good news for a change, the national and provincial elections were peacefully concluded in May 2024, and the new government of National Unity seems to have been well received and tangible change is being felt. Last week, we saw the first interest rate cut of 0.25%, which while small, signals the beginning of a rate cut cycle. Inflation is under control and within SAB targets. And hopefully, now we can start to see the green shoots of an improving local economy. Looking at our international markets. Our African markets did show growth in FY '24 with a strong second half performance. This was, however, constrained by foreign exchange shortages in certain countries. Focus on Africa will continue on a low capital, low-risk basis as we have done in the past. The U.K. has had an excellent year, driven primarily by significant project work successfully executed during the year. A portion of this work extends into FY '25 and further opportunity for sustainable growth exists in the U.K. and resources are in place to unlock these. Moving on to our salient features for the year. Revenue grew 12.6% to ZAR 565.8 million, despite subdued demand domestically. HEPS grew exponentially off a weak base to ZAR 0.361 per share. Cash from operations was a very healthy ZAR 51.1 million, and the group's net debt improved to ZAR 115.7 million from ZAR 146.7 million in the prior year. The key challenges faced by the group in the period were declining revenue in the domestic market and high opening debt levels at higher interest rates. In response, the following was achieved. Revenue from international markets increased to ZAR 173 million, offsetting the declines in local revenue. Our net debt of ZAR 115.7 million at year-end is an improvement of ZAR 31 million from end June 2023, funded by improved profits and solid cash generation. Further to this, our debt facilities were favorably restructured effective September 2024. Net debt levels continue to decline in quarter 1 FY '25 and coupled with lower interest rates, the group's interest burden will ease in the year ahead. We recognize that the domestic market will likely continue to face macroeconomic challenges for some time despite the beginning of an interest rate cut cycle, improved sentiment and reduced levels of inflation. Accordingly, our strategies remain focused on continuing to reduce the current level debt in the group, added by the restructure of the debt facilities, further improving working capital management, rigorous cost control, including the implementation of a cost reduction program in the Trellidor business, 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 details. Thank you.

Thanks, Terry, and to the PSG team for hosting us once again. Good afternoon, everyone, and thanks for joining us today. Overall, the group's revenue is up 12.6% from F '23 levels, driven by the strong performance in the U.K., which offset weaker demand in RSA. At this point, I would like to complement our U.K. team for their stellar performance during the year. Operating margins followed the top line increasing to 11.1%. And as a result, we are reporting headline earnings per share of ZAR 0.361. Looking at a snapshot of our segment analysis, the Trellidor's strong international performance, it means that, it increased its contribution to the group's performance to 71% from 65%. Operating profit followed the suite with 94% of the contribution coming from the Trellidor side of the business. Following on from the trend reported at half year, our security products increased their contribution from F '23 to 71% at the end of the 2024 financial year. And from a geographical split perspective, weaker demand in South Africa, coupled with the strong performance internationally means that our international contribution increased from 18% in F '23 to 31% in F '24. Taking a look at the business units in a bit more detail. Trellidor increased revenue by 22.6%, which, as highlighted earlier, is thanks to a strong performance from the International divisions. Operating margins have improved, which was assisted by rigorous cost control, which will continue into F '25. Taylor is reporting a 5% decline in revenue from F '23, but it must be noted that at half year, the brand was 11.5% behind prior year. H2 was positive from a top line perspective and coupled with stabilized margins and a settled management team, continued improvement is anticipated into F '25. Similar to Taylor, NMC also had a better H2, clawing back from a deficit of 14.9% at half 1 to 10.2% down at the full year. Focus continues on the Gauteng region, which was the hardest hit from a decline perspective during F '24. Stabilizing the balance sheet and reducing debt was a major focus area for the group during F '24. It is pleasing to report that our net debt position improved by ZAR 31 million, driven by increased profitability. A debt restructure process commenced during F '24, which was finalized early into F '25 and will further reduce debt servicing costs through the course of the year. Debt levels do, however, remain elevated. And as a result, the Board has resolved not to declare a final dividend. Improved financial performance, coupled with the reduction in debt levels means that the group was well within its covenant levels as at 30 June 2024 before taking into account the debt restructure. The debt-to-equity ratio has improved from 70% at the end of F '23 to 49% as at 30 June 2024, which is back in line with F '21 debt levels. Interest cover has improved from F '23 levels and will continue to improve following the debt restructure and the reduction in the interest rates recently announced. Overall, working capital has been well managed during the year across the group. The Taylor management team specifically have managed to sustainably reduce their inventory levels by circa ZAR 10 million. The increase in trade receivables is attributable to a buildup of the debtors book in the U.K. that was released early into F '25. Cash generation has always been a cornerstone of this business and the increased profitability and solid net working capital management during the year means the improvements in cash generation reported at half year continued into H2. We closed F '24 tracking back to F '21 levels in terms of free cash flow at ZAR 61.5 million. In conclusion, although positive strides have been made during F '24, we continue to focus on further reduction in debt levels and rigorous cost control to ensure that the group is well placed to maximize return for shareholders with an improving top line. Thanks again for joining us this afternoon. Additional information is included in the annexure to this presentation to complement the long-form announcement, which was released this morning. But for now, I'm going to hand back to the PSG team. Thank you very much.

[Operator Instructions] At the moment, I see there are no questions. I'll just give that a moment. There we go. I thought it would be very honest, there were no questions. Right. The first question is from Charles Bowles. Could you give us some sense of the competitive development in the security products?

Yes. Thanks, Charles. I'll talk to the local market. The space has been competitive for some time now. In terms of the barrier security side, there's a set of competitors. And in the decorative side, there's a set of competitors, some of which overlap. The sort of traditional security barrier space is pretty much the same competitors that we've dealt with over a number of years. No major developments there. There was a change of ownership in one of the businesses, but nothing too dramatic. In the aluminum space, I would say there's increased competition, particularly in the decorative aluminum product set, where barriers to entry are lower for competitors.

Thanks, Terry. Next question from an anonymous attendee. At what debt levels would it be considered sufficiently low for the company to reintroduce dividends?

Yes. It is something that we're discussing actively at Board. We are looking at our debt levels with regard to sustainable EBITDA. And as soon as we are comfortable in what is still quite an uncertain market, we will actively discuss returning to dividends. At this stage, we believe we've still got a way to go, although the extent at which we were able to pay down debt in the past financial year is very encouraging as to where we're going, where the cash generation is strong. So we do actively discuss that with the Board. But at this stage, we're not in a position to forecast where we're going to be with regard to dividends.

Thanks, Terry. A follow-up from Charles asking whether you could also give the participants a sense of whether electronic security products are replacing physical security solutions?

Yes. Thanks, Charles. I think that is a reality as electronic solutions improve. But I think you've got to couple that with the armed response market and improved suburban community patrol systems and forums, boomed-off areas and so on. And I think the reality is in tough economic times, consumers will always look to the alternatives that are around. And if certain alternatives and in this case, electronic are more affordable, it's possible that, that would take preference. So we have seen a decline in the domestic market, which is probably greater than the state of the economy. And I think that points to low disposable income levels and cheaper alternatives being sought. We do keep a very active eye on the market. And where we found the pressure points are generally speaking, in the bigger cities and the armed response industry and community forums are possibly stronger in the bigger cities than they are in the rural areas.

Thanks, Terry. And then I have two questions from [ Royce Long and Rees Sumiton, ] both relating to the U.K. business. So I'll lump them together. Asking whether you can elaborate on the sustainability of the U.K. business. You mentioned normalized and contract work in the presentation. And the question is, how do you see 2025 unfolding. Following on that, obviously, is the dramatic improved U.K. performance and the question as to whether that is sustainable into the next year and possibly thereafter. And then asking just for you to elaborate on the U.K. strategy.

Yes, we certainly have a good pipeline going into 2025. And certainly, for the first half of the year, we've got a very solid pipeline. We will be concluding one of the projects towards the end of the first half of the year. And we're obviously working hard in replacing that work in our forward pipeline. But we did have an abnormal level of activity through the last year, and I think we've tried to indicate that in the results. But our key focus in the U.K. is to continue growing our base of customers, which definitely has good momentum. And I think because of the relationships we built over many, many years with our customer base, and our corporate customer base, we are starting to see an increased activity in these larger projects, which is not only from one customer, it's from a broader set of customers. So we do believe that strategy is working. And I think the reality is what we have learned is that it doesn't happen overnight. These things take years to develop in terms of relationships. And even once listed and once embed with a new corporate client, it takes years after that to start to see a strongly increased flow of work from those customers. So we're not new in the market. Trellidor has been in the U.K. for north of 20 years, and we have developed some very good relationships. When we bought the U.K. business back a couple of years ago, our intent was to accelerate that foundation that we had built over the time, which was quite conservatively built, and we are making good traction in that, in the U.K. So we do see the growth opportunities there. I think the reality is the revenue is lumpy. And our mission is to smooth that out by continually adding to our base of customers.

Then there's a follow-up question from anonymous, regarding the dividend payment. So the potential reintroduction of dividends on satisfactory decrease of debt was mentioned. But the question is whether buybacks would also be on the table given the current market valuation of Trellidor?

Yes, I think our core focus at this stage remains reducing our net debt levels. And as I said, we have made very good progress in doing that. Every Board meeting, once a quarter, we sit and we assess our situation on our balance sheet. And yes, share buybacks are also always on the agenda. Certainly at the lower levels of share price. But at this stage, we remain focused on accelerating the reduction of our net debt situation in what remains a high interest rate situation at the moment. So that -- we are seeing the interest rate cut cycle being implemented, but interest rates are still at a high level. So we think that's in our interest not only to reduce our cost burden on the income statement by dropping our debt levels, but also to reduce risk in what remains an uncertain market.

Then another question -- a follow-up from Charles, Terry, in relation to the U.K. business. So you mentioned the fact that you benefit from contracting. And the question is, obviously, the nature of your business is usually contracts as opposed to annuity based. The question is what makes the U.K. abnormal in this regard?

Yes. Thanks, Charles. The market sets or the market focus in locally, if you like, is very weighted towards residential market, homes and protecting homes. While we do have a business-to-business element, the lion's share of the turnover is residential in the local market. Whereas in the U.K., we're -- high 90% in the business-to-business space and quite concentrated in big corporates in that business-to-business space. So that's, hence, the different flow of revenues and contract type work, if you like, CapEx type projects that our clients are implementing at the time, and we benefit from those.

Thanks, Terry. Then there is two questions in relation to the franchise system in South Africa. The first one is whether you still have the same franchise model in SA and whether it is a cost-effective distribution solution. And following on from that is whether the strategy that Trellidor previously had of buying back certain franchises and whether this is also a possible application of capital once you've reduced the debt further in the future.

Yes. Thanks for that. The franchise model prevails in South Africa. We do believe it is still relevant. And we do believe it is cost effective, particularly outside of the main metros. It's -- our network is very widely geographically spread, which we regard as a strength. And to replicate that in an owned store scenario, we're not convinced that we could do it better. In the cities, I think your -- part of your question was the strategy to buy back certain franchises. That is limited to the four main cities being Johannesburg, Pretoria, Cape Town, and Durban, where we have partially bought back the franchises in those areas, not all of them, and we've established corporate offices. That has worked to a degree and not to a degree. So two of three branches are working really nicely. And [indiscernible] is not. So that's receiving a lot of attention. And it comes down to a quality sales process in our business. So we still believe the owner-operator in a franchise model is a quality individual in a small town outside of the cities that can do a better job representing our product sets and our brands than an employed individual in a small town somewhere outside the main cities in South Africa. So I don't know if that fully answers the question. But the -- a big plus with a franchise model is, if you like, your sales overhead is a variable overhead, because our model is a trading model. Where our franchisees purchase product from us on a discounted price and on sell that to the customer on our price list. So the benefit of a variable cost model in a depressed market is quite clear. That said, these small businesses are also feeling the pain of lower disposable income and lower consumer spend, and they need to respond to that in their own ways. And in part, that has become a bit of a problem for us in that, any cost reduction in a small business when you aggregate it across the network, potentially has a compounding effect, and that is receiving considerable attention from our management teams, and we certainly believe we're starting to see the traction in the right direction. It will help if those green shoots I mentioned earlier do start to show themselves now that we've seen some positives in our local economy.

Charles, I'm just saying to Terry and Damian that we've done on the results. And the question is whether it has been a very credible performance, especially in the cash generation and debt reduction. And I think that's more of a complement than a question. But Charles, let us know if there's any further questions you've got. And I think to all the attendees, if there are any follow-up questions or you require any further detail, please don't hesitate to contact the PSG Capital team or Terry and Damian. And let us know if there's any other further questions or information you require, we would happily address those via e-mail or a call. Yes. So I think, thank you for the compliments. From our side as well, Terry and Damian, thank you for your hard work. And clearly, we can see there's been a lot of time that's been put in by the execs and the Board in getting back on a growth path and projection. And yes, congratulations on the great results. All right. Given there's no further questions, we're going to end the webinar. Thanks.