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Edited Transcript of BAW.J earnings conference call or presentation 30-Jun-20 9:00am GMT

Half Year 2020 Barloworld Ltd Earnings Call

Sandton Jun 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Barloworld Ltd earnings conference call or presentation Tuesday, June 30, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Charl Groenewald

Barloworld Limited - CEO of Barloworld Logistic Africa

* Dominic Malentsha Sewela

Barloworld Limited - Group CEO & Executive Director

* Emmanuel Leeka

Barloworld Limited - CEO of Barloworld Equipment Southern Africa

* Kamogelo Mmutlana

Barloworld Limited - CEO of Barloworld Automotive & Logistics

* Nopasika Vuyelwa Lila

Barloworld Limited - Group Finance Director & Director

* Quinton McGeer

Barloworld Limited - CEO of Barloworld Equipment Russia & UK

* Zanele Salman

Barloworld Limited - Head of IR

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Presentation

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Zanele Salman, Barloworld Limited - Head of IR [1]

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Good morning, everyone, and thank you very much for joining us this morning for Barloworld's interim results presentation. I hope wherever you are, that you're well and you're keeping safe.

We released our results this morning. And during the presentation, our executives will take us through the highlights of our performance for the 6 months to 31st of March. Please note that we will take questions through -- only through the webcast. Feel free during the presentation to send your questions, and you'll also have an opportunity at the end of the presentation to do the same. We will consolidate all the questions and make sure that they're all responded to. Please also note that our executive responsible for Barloworld Equipment Russia will be dialing -- Quinton McGeer will be dialing in from his home in the U.K., and we will stream live with him via Zoom.

Before we continue with the presentation, please take note of the following safety video. Thank you.

(presentation)

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Dominic Malentsha Sewela, Barloworld Limited - Group CEO & Executive Director [2]

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Good morning, ladies and gentlemen. I must say from the onset, if you told me 6 months ago or so that I'll be standing in a room half empty with my executive, social distancing, with the challenges we have with connectivity, I wouldn't have thought we would be here. And I must say this has been a very difficult challenging environment, not just only from a business point of view, but at a personal level, when I look at the staff, the impact they've had psychologically, it has been difficult indeed.

But I must say that COVID-19 has put sharp focus when it came to issues of sustainability. And I think at Barloworld, I'm glad that much earlier before it was invoked to talk about sustainability, to talk about diversity and inclusion, we had embarked on the process of ensuring that, as a company, we invest in sustainability, when you look at how we use water, when you look at the investment we've made in terms of solar energy so that we don't draw a lot of electricity. But of the importance is making sure that whatever decision we make, it is in the best interest of all our stakeholders, not just one, but all. Because if you're not able to do that, you create a lot of unsustainable process. And I guess going through what we had to go through over the last couple of months as we made decisions, key for us was the safety of our employees. And I'm glad that we've had behavioral-based care that has inculcated a culture of safety at all times. And I think what we have to now do is to ensure that we embrace a very culture as we ensure that our employees think more of the safety of their colleagues. To that extent, we've had only 38 employees thus far that have been infected with COVID-19, 19 of those have -- 29 of those have recovered, and thus far, we don't have any fatality.

During the lockdowns, we've had employees who couldn't work from home, and we have paid close to about ZAR 129 million over the last 2 months in salaries to ensure that we support those employees.

But of the importance, in terms of the communities where we operate in, we also focus on ensuring that those micro-enterprises and social entrepreneurs that we support through our Siyakhula program are supported. And we gave them an interest-free period where we deferred interest for a period of 6 months to the tune of about ZAR 1.8 million. We also put aside ZAR 24.4 million -- 24 -- ZAR 22.4 million, rather, to ensure that they could also preserve jobs. We had about 41 beneficiaries and where our 454 jobs have been saved. We've contributed through goods and services to the solidarity funds to the tune of ZAR 8.8 billion.

In terms of our Siyakhula transaction, we are able to negotiate with a bank an interest holiday of about 3 months, thus far, we've transferred 49 properties out of 64, which brought in about ZAR 2.2 billion. By and large, the bulk of that money was utilized to buy back shares, as we promised the shareholders at the time of doing the deal when we set up the foundation to the tune about 3% that we will do so.

Nonrenewable energy consumption is down 15%, as I've highlighted, in terms of our investments. Our greenhouse gas emissions, scope 1 and 2 is down 17%.

As I've highlighted, it's been very tough operating in this environment, but we had to act very fast, decisively during this period. We set up a Crisis Committee that had to formulate a policy that ensures the safety of our employees. We had to take salary cuts for a period of 12 months. This was to try and cushion the impact of cash spend as well as expense leakage in our operations. We have frozen appointments of new employees. We've engaged with various OEMs to extend payments. We've also deferred nonessential CapEx. To other extent, the objective was that we could be able over this year realize a saving of about ZAR 700 million to ZAR 720 million before cost -- before implementation costs. And I think we estimate that the implementation costs would be anything between ZAR 270 million to ZAR 300 million in this period.

Just to give you a highlight, revenue is down 12%. But if you look at the NMI business that is now being deconsolidated, our revenue is down 6%. Our group headline earnings on a normalized basis, are down about 33%, largely due to the DRC showing a loss over this reporting period. But of importance in this environment, a strong balance sheet is very important as you consider issues around liquidity and solvency. And I'm pleased that we currently stand at EUR 8.1 billion in terms of headroom, but we also are sitting with cash offshore. And I've already covered the issues in terms of the share buyback. I think, as you see, our ROIC in these numbers basically reflect IFRS 16, and you can actually see that Russia if I could highlight Russia for a minute, it has continued to perform above our hurdle rate. They've been down largely because of the devaluation of the ruble as well as withholding tax that has impacted their NOPAT. But the increase in invested capital is largely due to the large order book that they'll be delivering in the second half.

The others, I would like to talk about it towards the end. You can actually see that every single business has been impacted, but we remain focused in ensuring that Barloworld ensures that we can focus on return, and I will cover that later.

I'm going to give over to you Nopasika. Thanks.

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Nopasika Vuyelwa Lila, Barloworld Limited - Group Finance Director & Director [3]

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Thank you, Dominic, and welcome to all in attendance this morning.

So looking at our accounting policies. We have not had any material changes there, with the exception of the adoption of IFRS 16, which came into effect on the 1st of October 2019. As we go through the presentation, you will observe the impact that IFRS 16 has had on the numbers as well as then, obviously, the enhanced disclosure notes that have been required as a result. Important to bring to your attention at this point in time is the fact that our numbers have not been reviewed due to the challenges that were experienced with the lockdown, hence, the complexity of performing an audit during this time.

Operational changes, we've had 2 to note. One is the IFRS -- the Avis Fleet that was held for sale in the first 6 months. And in the previous period, in comparison, it was a continuing operation. Therefore, we've had to restate the 2019 comparators.

NMI, equity accounted for the first 6 months because it is an associate, whereas compared to the previous period, it was fully consolidated into our numbers.

A snapshot performance of the specific anomalies that you will find in our numbers are highlighted here, and I will unpack the numbers through the presentation.

You see IFRS impact in the income statement, ZAR 58 million. We also have Khula Sizwe, ZAR 132 million, which was implemented for the first time in the current financial period. And also, the nonoperating and capital items, which I will unpack as we go through.

The results for the period was below expectation, with EBITDA 8% below -- that which was -- below previous financial year. Also, we closed off the 6 months with a loss of ZAR 1.5 billion. And you will note on that line, nonoperating capital item, ZAR 1.7 billion, it has contributed substantially, and that line relates to the goodwill and impairments on intangible asset.

The revenue for the group on a continuing operation has reduced in the current period to ZAR 25.2 billion, and this represents ZAR 12 billion I -- sorry, 12% compared to the previous year. And as Dominic has indicated, a fair comparison would be the 6% reduction in revenue if you take out the ZAR 2 billion included for NMI revenue included in the previous financial year numbers.

On the operating profit side, including IFRS 16, the results were down 28%, and excluding, 34%.

Sterling performance coming through from Equipment Russia as well as, if we look at Equipment Southern Africa, yes, there were challenges went down in the current financial period. And we saw a very good balance coming through from the cost containment in order to balance the operating profit there.

On the automotive side, we've had significant reduction or decline. And this has been as a result of motor trading, which did not perform as expected, and also the margin pressures on the car rental side.

Exposure to foreign currency is well managed by the group and -- as it is evident with the marginal increase in the reported period. Looking at our net finance costs, we've had a marginal increase, and you will note, again, the impact of IFRS 16 on the finance cost is ZAR 137 million in the 6 months. And we've had a benefit of the low funding costs coming through in the country which were much lower than would have been expected, and this has really boosted the numbers a little bit there.

Looking at the nonoperating capital items. This is one of the items one has to unpack in a little bit of more detail. So you see the Car Rental goodwill and Equipment there, and that is the goodwill that we've had to write-off. And this is on the back of the lower projections, cash flows as resulting from the COVID-19 as well as the higher discount rates that we've had to apply, specifically, in-country risk when we're looking at our work number. Also written off is our investments. We've written off investments NMI, written off ZAR 124 million. And looking at BHBW, we've written off ZAR 187 million in the current period. And that is what makes the substantial amount thereof ZAR 1.7 billion.

The effective tax rate at a negative 33% is significantly lower than the statutory rate of 28%. And you can see then the big contributors to that reduction is the permanent differences for tax purposes as well as the exceptional tax items that came through in the period.

When we look at our JVs and associate for the 6 months, they did return negative loss of ZAR 63 million. They remain under pressure from the 6 months, and we do not necessarily foresee a huge change in the next 6 months, but there is a promise that potentially we could see a little bit of a difference there. On the HEPS, the number has moved from the previous period from ZAR 475 million and normalized, we're sitting at ZAR 354 million. And due -- again, the reason is the fact that the risk -- reduced results that have come through from the divisions, and that has been the largest contributor. We've also had IFRS 2 charges that have come through for the very first time in the reporting period as well as IFRS 16.

The financial position remains strong and was impacted by the deconsolidation of Avis Fleet and NMI. And this, you can see through the various asset and liability classes that have been affected by those items.

If you cast your eye to the equity line, you will see a reduction of ZAR 2.8 billion. And the reduction is as a result of the general losses that I've spoken to as well as the dividend repayment. You will recall, we also did a performance share buyback during the 6 months amounting to ZAR 1.6 billion.

Looking at our net debt position. There has been an increase in our net debt from ZAR 1.1 billion to ZAR 5.1 billion. Looking at the gross debt levels, that have remained fairly constant with an increase of approximately ZAR 1.5 billion.

We continue to be comfortable and we've been comfortably meeting our covenants. Key to note is the net debt EBITDA remains at 0.9x. And EBITDA to interest cover at 5.5x. And you can see that these covenants are well above the agreements with the bank, and especially with the covenant of 3.5 for EBITDA interest cover.

Now on this slide are the subsequent events to take note of.

The first item, looking at Avis Fleet. Going forward, Avis Fleet will no longer be held for sale, and we'll expect that to be part of continuing operation. Also, we've increased our bond program to ZAR 15 billion, in line with our strategy. And also, we've also engaged in a lot of austerity measure in order to maintain and contain our costs.

So how do we see the benefit coming through from the cost containment measures that we've implemented? So in the 6 months to come, we do foresee a saving in the salary sacrifices from our employees, which we anticipate will be about approximately ZAR 276 million. Also, we've realized savings on leases. And capital spend has been reduced, and again, there, we foresee a saving of about ZAR 600 million coming through there. And as well as other austerity measures that will give rise to a further ZAR 204 million. And as management, we'll continue to keep our eyes open and looking at any further opportunities that will assist us to contain costs.

In conclusion, Barloworld, with a strong balance sheet, with a very healthy gearing position, comfortable liquidity position, and the firm cost containment measures that we've implemented, we are comfortable that we are well set for a sustainable business going forward. Thank you.

I'll now hand over to Kamo.

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Kamogelo Mmutlana, Barloworld Limited - CEO of Barloworld Automotive & Logistics [4]

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Good morning, ladies and gentlemen. It is indeed an honor to present and review the Barloworld Automotive results for the period ended March 2020.

Our operating environment has been characterized by general economic deterioration across all of our market segments and business units at varying levels, some more affected than others. However, the integrated portfolio is holding, albeit performance is heavily impacted.

NAAMSA and SAVRALA market stats has reported and indicated that the NAAMSA market has been down by 7.9% while SAVRALA was marginally up on prior period, with both industries demonstrating a decline of double-digit in the month of March 2020. This has impacted our financial performance significantly compared to the prior period with returns declining from 11.2% to 9.1%, largely as a result of poor quality of margins as well as poor sales mix and declined volumes in the prior period.

Strong cash flows have been generated as a result of the property transaction that was concluded with Khula Sizwe. We have further benefited from the softening of the impact of COVID-19 and the harsher trading conditions as a result of good balance sheet management.

The Motor Trading business. While the market has declined, you've seen motor retail retaining market share in the process. Industry volume brands have all but mostly experienced contraction in both volumes and margins, with reduced invested capital of about ZAR 700 million and benefiting cash inflows from the transfer of these properties in the ensuing period. The pressure on margins has severely impacted our selling gross margins, resulting in lower contribution across all the segments, with the exception of our parts business.

On the rent a car side, we have seen key value drivers negatively impacted, with marginal decline in our rate per day, coupled with the decline in rental days in March 2020. The used vehicle sales however have posted a very strong performance, with op margin increase against the same period last year. This was achieved despite lower unit sales in the process. We have further made good progress in achieving a reduction in damages cost through the implementation of a damages management system.

The business has improved marginally on utilization. We just forecasted cash inflows arising out of the COVID-19 impact on the business, we have impaired goodwill by ZAR 619 million.

The negative impact of COVID-19 already experienced in the months of April and May have been quite glaring. However, we see opportunities going forward within the used vehicle market on the back of new vehicle pricing increases that have already been announced by various OEMs. We further see opportunities in our service and parts business, particularly with the rise in the extension of vehicle ownership periods as customers delay vehicle investment choices due to lower disposal incomes.

When you look at our business going forward, we want to continue to drive a fit-for-purpose business model with improved cost of engagement that will be able to facilitate market growth, and we will do this through the reduction of operating costs targeted at a range of about 25% to 30% of overall divisional costs, including, but not limited to retrenchments, that will be in excess of 2,500 positions impacted. The rationalization of our dealership portfolio is underway, which will result in a number of dealership closures as well as retrenchment of not less than 25% to 30% of the motor retail staff complement. We will further personalize the rent a car branch network with a closure of at least 26 of the 90 branches that we have and further impacting about between 50% to 60% of our staff positions in this business. We will also look at the consolidation and possible exit of leased properties in favor of owned properties where feasible. We will continue to drive the implementation of Barloworld Business Systems as we seek to eliminate waste, and importantly, prioritize customer value propositions and customer experiences as we drive the preservation of cash and the generation of cash through the sale of fleet into cash.

With that, ladies and gentlemen, I would like to conclude and invite Charl Groenewald to present the Logistics segment. Thank you.

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Charl Groenewald, Barloworld Limited - CEO of Barloworld Logistic Africa [5]

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Good morning, everybody. Just to start off with, I just want to give you progress that we've made in our turnaround strategy. We have concluded the sale of our Middle East business in February 2020, and the exit of our SmartMatta business is well on track. Just for reference, this has taken over 2 years to dispose of these 2 businesses, and it's taken a long road for our team.

If you look at the results at the bottom, you'll notice that our revenue was down 28%. This has been impacted as a result of KLL, which was exited and closed in 2019, as well as the Middle East included in our numbers. We have not -- we have seen one -- or higher retention rate of our contracts with a loss of one of our 2019 contracts being replaced by new business in 2020.

If you look at our operating profit, you'll notice that we -- from an EBITDA point of view, we're positive. However, the IFRS 16 has had a positive impact on that. And we have been impacted by COVID-19 as well as a high cost of our fixed cost base.

If you look at our invested capital, that increase has included ZAR 600 million of IFRS 16 adjustments. And excluding that, we've seen a ZAR 300 million reduction in our invested capital.

If I look at our outlook, and these 2 graphs basically share what has happened with us in COVID-19.

You'll notice in our transport business, we were ahead of 2019 revenue up until January, and you see the impact coming through from February with lower volumes being imported. This is also evident in our global freight business. As we went into Level 5, you'll notice a sharp drop off in April, but also provided you with a catch-up of what we saw in April with the port restrictions that were occurring. We did take advantage of the SARS import duty deferment in June, and that will help us with cash preservations for the rest of the year. If you're looking forward, in February, we were on track to meet our targets for 2020. However, COVID has put us straight back into that fixed strategy. Our fit-for-purpose cost base has been influenced, and we are looking in the Section 189 to eliminate 23% to estimated 23% or 25% of that cost base, and that should put us in a good position for 2021 with a fit-for-purpose cost base.

And Kamo would have shared the shared services that we put in place in the division, and that enables us to achieve this type of reduction that we're expecting.

Our invested capital is also expected to reduce further, and this is leveraging the Avis Fleet capacity and as well as optimizing our cost per kilometer through that team.

We have enjoyed a high contract retention rate during this period. And we've also enjoyed the acquisition of 2- to 5-year contracts in our transport business as well as some new alliances in our global freight business, which should start stabilizing our revenue after some turbulent years.

We continue with our digital transformation. And our transport management solution that we implemented recently is proving to save a lot of money for our customers.

So in closing, I'd like-to-like to hand over to Quinton who'll take us through the Equipment Russia business.

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Quinton McGeer, Barloworld Limited - CEO of Barloworld Equipment Russia & UK [6]

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Good morning, ladies and gentlemen, from a cloudy and rainy U.K. I am very pleased to present the Russian results first half financial year 2020.

The Russian team presented a very strong result during the first 6 months, with revenue up by 15%, particularly driven by strong sales into the gold segment. This resulted in operating profit being up by 17%, the second best ever operating profit generated by the division. The aftermarket business remains active but was negatively impacted by the slowdown in the coal segment. The operating margins improved compared to prior year despite the change in sales mix. And this was largely due to the fact that the better margin realization in both prime product as well as the aftermarket segment. The group generated ROIC well in excess of the group's hurdle rates of 13%, but as Dominic alluded to, was negatively impacted by quite a big IAS 12.41 charge that came through on the ruble devaluing at the back end of March.

If we unpack revenue a little bit more, it's clear to see that the mining segment contributes 85% of the total revenue generated. Aftermarket for the half year dropped to 43% of total revenue, down from 50% compared to last year. This was on the back of a very strong prime product sales delivery in the first 6 months, which increased by 25%.

If -- BT is very, very fortunate. If we look at our commodity exposure to a wide commodity mix. Gold contributed 43% of the overall revenue line versus 35% compared to the previous year. One can clearly see the impact of coal, we were 29% in the 2019 year, down to a 17% contribution in 2020. It's pleasing to note that copper and nickel, the growth from 8% to 15% in the 2020 numbers. So a very diversified portfolio. If we look at our map of customers throughout Russia, definitely less activity throughout Russia with many of the mining houses postponing CapEx investment. But in saying that, there is still a lot of opportunity for BT to participate in and to capture.

I want to highlight 2 main greenfield opportunity that's imminent. One is the gas mineral opportunity in the Russian Far East, where the pre-feasibility study has been completed. We've participated in various tenders. And we are awaiting the final results in terms of when that greenfield will come online. The same on Sukhoi Log. This is a little bit further out, but it is slowly but surely gaining traction, with Polyus currently performing feasibility studies, banking feasibility studies in terms of what is required to develop that greenfield. So exciting times ahead and lots of opportunity from that perspective.

If we look at our key initiatives, I think I'm not going to go through all of them. I just want to highlight 1 or 2.

I think one of the key ones for us is to double our services through to 2026 on the base of 2016 numbers. We're well on our way to achieve that target with the compounded annual growth that we've achieved from 2016 through to 2020, the first half. Digital remains a key initiative for us as well, and we've made great progress in developing our digital capability as well as our technology capability to deliver solutions to assist our customers. Predictive analytics is becoming more and more important for us in helping our customers to reduce cost of ownership. E-commerce channels, specifically over the last 12 months has gained traction, although still very small. We have managed to double the revenue coming through that channel. So -- and then I think lastly, ROIC and safety will always be a key issue for the Russian team.

So in terms of the outlook, we remain optimistic that through to September, we will deliver another solid performance. If one takes the performance post balance sheet -- post half year into account, we've had 3 trading months and we're tracking very, very close to what we did in the prior year. We expect to deliver -- to remain above the ROIC hurdle rate. And I think lastly, I would just like to highlight the firm order book where we -- at the half year, we had a $62 million from order book. And post half year, we've managed to increase that by a further $56 million over the last 3 months to $180 million. So the division is well positioned, and we are optimistic to deliver a solid result through to September.

And with that, I would like to thank you and hand over to Emmy.

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Emmanuel Leeka, Barloworld Limited - CEO of Barloworld Equipment Southern Africa [7]

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Thank you, Quinton. Good morning, ladies and gentlemen.

Revenue down 11.1% at ZAR 8.9 billion, mainly due to lower machine sales. Our aftermarket was resilient with a drop of 3.3%, mainly driven by activity in Zambia, the lower exchange rate in terms of translations of the results in the rest of Africa, which are reported in dollars, saw an uplift of 1.5% to our sales. A favorable aftermarket mix as well as a clear focus on reducing cost helped us to maintain our operating profit margin of 8.1%. On a like-to-like basis, the invested capital before IFRS 16 was down by over ZAR 1 billion by about 8.5%. The division continued to generate positive cash of ZAR 738 million compared to prior year at ZAR 331 million.

Now turning to equipment sales by market segment.

The machine sales were down by 19.3%. Bearing in mind that in 2019, the contractor Mota Engil in Mozambique contributed to about ZAR 596 million for the first half. If you strip that out, contract mining came down at 11%, and hence, you can see a drop from 30% to 15%. It was pleasing to see activity increasing in the mining sector as well as a significant reduction in terms of construction sector from 40% to 24% contribution. Be it at a lower base, the contribution of our power business increased from 6% to 12%. The growth in energy and transportation was at 49%.

The exposure to different commodities helped us to defend against cyclicality, driven mainly by coal, followed by precious metals, gold and platinum as well as ferrous metals. The resilient aftermarket contribution increased to 58% compared to prior year at 53%.

Now turning to the financial returns by country, including IFRS 16, with lower activity in South Africa, indicated as well previously, the performance of Bartrac.

In South Africa, NOPAT, quite low, and hence, that reduction of 17.4% to 11.8% in terms of ROIC.

And if you look at the devaluation of the currencies in both Mozambique, Zambia as well as Angola, with regards to IAS 12.41 deferred tax charge, which has seen an increase overall of our effective tax rate from 33% to 44%.

We've continued to reduce our invested capital as promised in Botswana and Angola, and hence, the positive trend when you look at the performance in terms of ROIC. The adoption of IFRS 16 with the right-of-use of assets of ZAR 1.3 billion saw an increase of ZAR 270 million in terms of our invested capital. And hence, combining all this, we saw a decrease in our ROIC of 400 basis points. As indicated, lower returns in the Democratic Republic of Congo, the contribution in terms of our Bartrac business was significantly impacted by 2 of our major customers, namely MUMI, who are still in terms of care maintenance and lower activity at (inaudible). The copper prices remain subdued during the period. We have seen (inaudible) recently. The share of income from our joint venture in the Republic is expected to remain low for the remainder of the current financial year.

We were on track in delivering in terms of our divisional strategy. COVID-19 has set us back. We will continue to focus on fixing this business, as indicated previously by Quinton, aligned to the caterpillar strategy of growing the aftermarket and doubling the aftermarket by 2026.

Reducing cost and invested capital has never been so important in this COVID-19 dome. We'll improve performance in the regions below the hurdle rate, but also, the issue regarding efficiencies, Barloworld Business System will give us the tools and processes to ensure that we galvanize and leverage from all our associates in 11 countries in order to deliver on our promise and execute on our strategy.

A pleasing pipeline. I will highlight the greenfields and brownfields project in Mogalakwena, where we're in a position to seed and place 4 of the electric drive trucks, the 794s, which are one of the kind, the first in our continent on a trial and buy for a period of 12 months. We are looking forward to see that, which will help us and give us a footstool in terms of making sure that we can move into countries like Namibia for Husab project, but also at Kolomela project, (inaudible) project in the Northern Cape where there's a significant opportunity of placing those electric drive trucks.

Outlook remains challenging, and the midterm activity levels expected to improve as lockdown restrictions are eased in many countries. A slowdown in the global economy is expected, with infrastructure projects unlikely to turn in the near term. Regional economies are focused in negative growth rates and redirecting the public spend to health care. With our partner, Cat Finance, in South Africa, we will continue to support the aftermarket for both the emerging contractors and contract miners. We are also looking with Cat Finance to expand our footprint into the neighboring countries.

Growth in services and machine population remains a priority. We will continue to execute on identified countermeasures to minimize the impact of COVID-19, leveraging BBS to support our strategic priorities.

Ladies and gentlemen, it's pleasing to see that our firm book orders still maintain a ZAR 2.4 billion even after the balance sheet -- post balance sheet reporting.

I would like to hand you back to Dominic. Thank you.

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Dominic Malentsha Sewela, Barloworld Limited - Group CEO & Executive Director [8]

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Ladies and gentlemen, as I said earlier on that, I will come back to the issue of the fix and optimize. And as you've heard Kamo and Emmy, the trading environment in the rest of Africa, very challenging, if you look at countries like Botswana, Angola. And things like oil prices as well as the diamond prices has put a lot of pressure. We've seen Botswana mines being closed for a while, and we had challenges in terms of currencies in Angola. But overall, when you look at consumer confidence, it's going to be further impacted post-COVID-19 in terms of the retrenchments, because we're not the only one being caught up in this market. So the further retrenchments of (inaudible) wasn't situation in a very difficult environment. To that extent, you've seen the returns were all lower than anticipated. And most of it is not just only COVID-19, because leading to this period, already we were in a weak environment. To that extent, Emmy's focus over the next 18 months to 24 months, because we think it is going to be a long period that we're going to go through before we see things normalize. I think the talks of infrastructure has been -- I've spoken a lot about it, but nothing has actually come of it in South Africa, but we're not going to hold our breath on that. So it will be very important that we focus on fixing the business. I think Emmy, just like Kamo said, is currently looking at consultation that would lead to us rightsizing that business. And similarly, Kamo has highlighted those issues.

But I think of importance for me is just reflecting on the decisions we made 3 years ago. Some of you would remember that I had -- I made a decision that when I look at the plans of Aspen, it didn't look viable that we can be able to turn that business around in 5 years. Whereas when I looked at logistics, at the time, I thought, it's a credible plan that could be implemented. It was important that we gave it space. And I did commit that this year -- and at the time I said, September of this year, we'll come back to the decision to say, where do we go with logistics? But notwithstanding all the good work that Shell has done over this period, I mean selling some of the businesses, creating more efficiency, driving and entrenching the culture of eliminating waste, I think I have to realize that, sometimes, the reputation of the business remains consistent. And a lot of people have engaged me on this matter. And I felt that there's a good chance that we could achieve it. But I think I've made a decision now going forward that we will be exiting logistics business. We will, therefore, be putting processes in place to find a way of ensuring that we realize value, given the fact that, over the last 3 years, we've spent time fixing this business.

The automotive business is now put under business review, which means, basically, we are going to look at this business and look at alternatives of saying, what do we do with it? And I'll be presenting that to the Board, and we'll update the market when we release the results to September. I'm pleased to say, when you look at this shareholder active model, it has entrenched the right culture in terms of making sure that we focus on returns. We also make sure that we lead from the center in making sure that the metrics are very clear. The Barloworld Business System rollout in terms of improving employee engagement, I'm comfortable that it is now gaining momentum. So we can continue to unlock value and improve efficiencies in the divisions. But I must say that the decision to move the park was the right one. But I think when it comes to development, I don't think we will be able to develop a park. I kind of give an estimate given where we are with COVID-19 and what you've seen, it has done to property companies.

I think from a growth point of view, I've given an indication in terms of various sense and updates to say, Mongolia, we are currently observing and checking how is the territory performing given a continued lockdown in that territory. And the business is still likely to be concluded on the long stop date of 1st of October.

The acquisition of Tongaat Starch. We've also given an update that we have given notice to a material and other slots. And that is outlined in our sales and patches agreement. Currently, we are in a dispute with Tongaat. And we've referred that dispute to an accountant, which is going to take a while. But the same token, there is a long stop date. And this business -- this transaction won't close up until the issues of that make has been resolved.

So I think when you look at the macroeconomic conditions that we'll be trading in, we think, at least for the next 24 months, it will be a very turbulent and volatile environment that we'll be trading in. We'll remain to be very conservative in terms of our balance sheet and make sure that we continue to have a clear forecast in terms of cash generation, cost containment. And also, make sure that we can accelerate various platforms that we've currently built to make sure that we give our customers a better experience over the period.

I think I'll stop at that point and take questions if there are any? Zanele, are there questions?

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Questions and Answers

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Zanele Salman, Barloworld Limited - Head of IR [1]

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Yes. We have a few. So I'll start at the top with Marc Ter-Mors. What contributed to the strategic investment cost in automotive, reducing short-term margins?

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Dominic Malentsha Sewela, Barloworld Limited - Group CEO & Executive Director [2]

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Okay. Give me another one so that I ...

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Zanele Salman, Barloworld Limited - Head of IR [3]

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The next one. In car rental, can you please detail fleet reduction plans and the potential impact on residual values?

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Dominic Malentsha Sewela, Barloworld Limited - Group CEO & Executive Director [4]

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Okay.

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Zanele Salman, Barloworld Limited - Head of IR [5]

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And then next one from David Fraser at Peregrine Capital. Can you please clarify the strategy around the fleet business? Is it to wind it down as contracts expire? Please confirm intended job cut numbers in automotive in both Avis, Retail and Fleet.

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Dominic Malentsha Sewela, Barloworld Limited - Group CEO & Executive Director [6]

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It's like Kamo, they want to talk to you today.

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Zanele Salman, Barloworld Limited - Head of IR [7]

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Yes. I've got a -- should I run through all of the ones?

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Dominic Malentsha Sewela, Barloworld Limited - Group CEO & Executive Director [8]

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Okay. You know what? Let Kamo answer that. Do you want to come up, Kamo? Answer those 4, and then we'll see if we can take the others.

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Kamogelo Mmutlana, Barloworld Limited - CEO of Barloworld Automotive & Logistics [9]

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Thank you very much. I hope that I captured all of them correctly. We may have to repeat some of those to ensure that we can address them sufficiently.

I think, firstly, on the issue of the strategic costs and the impact on margins. I think one has to, first and foremost, recognize the high fixed cost base of this particular business. And the strategic investment, if you are referring to the property sale transaction, that we would have incurred rental or lease costs increase of about ZAR 85 million in the process, within an environment, obviously, as we've already said, where sales volumes have been low the vehicle mix has been a bit poor. And obviously, we've had quite a bit of pressure as well on margins across the various value drivers such as newcastles, selling grosses, used vehicle sales selling grosses as well as, obviously, service hours have also been impacted. The only area that has really stood up in the process has been our parts business.

Coming to the second question, on the car rental fleet -- de-fleet plans. You would appreciate that at the start -- or at the end of the -- of this -- of March, we're already at the peak of our cycle in terms of the fleet size. We're sitting roughly at about 27,000 vehicles. And then towards the end of March or so, we had already in that 2 or 3 weeks managed to already de-fleet roughly about 5,000 vehicles as soon as we became aware of the serious impact of COVID. Having taken some leaf out of what ABG was going through, we decided to be proactive and start to look at retaining -- renegotiating with our OEMs, those who have given us vehicles on leases, to retain those, and vehicles that were of pretty much newer, we are able to mothball some of those. But our plans are such that we would want to de-fleet, and we're targeting to be able to get to about 10,000 vehicles by February of 2021, and we've got a clear plan of how to go about selling of these particular vehicles, and our teams are hard at work in being able to do that.

The issue on residual vehicles, at this point in time, we think they will hold off the back of new vehicle price increases that are already in effect. And so that supports obviously good residual values to be able to hold. However, we are quite cognizant of the impact of more and more used car volumes coming into the market, which may soften residual values somewhat. But at this point in time, we are confident that our plans are holding, and hopefully, we should continue to perform relatively well. That's what we hope to achieve in any event.

And the third question?

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Zanele Salman, Barloworld Limited - Head of IR [10]

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Intended job cuts for ...

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Kamogelo Mmutlana, Barloworld Limited - CEO of Barloworld Automotive & Logistics [11]

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Job cuts?

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Zanele Salman, Barloworld Limited - Head of IR [12]

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Yes.

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Kamogelo Mmutlana, Barloworld Limited - CEO of Barloworld Automotive & Logistics [13]

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Okay.

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Zanele Salman, Barloworld Limited - Head of IR [14]

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For in automotive, in both Avis Retail and Fleet.

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Kamogelo Mmutlana, Barloworld Limited - CEO of Barloworld Automotive & Logistics [15]

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Well, how many?

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Zanele Salman, Barloworld Limited - Head of IR [16]

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Yes.

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Kamogelo Mmutlana, Barloworld Limited - CEO of Barloworld Automotive & Logistics [17]

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Okay. If I start with Avis budget rent a car, we're targeting between 50% and 60% of the total employee base. We've already initiated the Section 189 process. We are currently in consultation with our various unions, and we're looking at how best to be able to come up with a solution that works for all parties concerned. In terms of motor retail at this point in time, we're targeting 30% of the total employee base. You may recall, motor retail went through this process about 3 years ago. So it had already been somewhat optimized, but we are reviewing all of that given the advent of COVID-19 and the consumer -- the pressure on consumer in terms of disposable income. We are reviewing some of the dealership network that we have, closing some of those, and equally so, reducing the number of people employed. In the logistics business as well, we're looking at roughly another 30% cuts. We have reduced our head office or we're targeting head office reduction of about 47% reduction. We have to look at doing things better and differently. And -- for people to be able to do things a lot more, you would appreciate that since the lockdown, most of us have been working virtually. And so that goes to show you how much we can still get done without having to follow the traditional way of doing things. So you find that all in all, the overall division, you're looking at roughly well in excess of 2,500 positions that are going to be impacted.

I hope that concludes all the questions. Thank you.

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Dominic Malentsha Sewela, Barloworld Limited - Group CEO & Executive Director [18]

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Thank you, ladies and gentlemen. We would respond to some of the questions via e-mail because I think, in the interest of time, we've got the questions that have been asked mainly by analysts. And then hopefully, in the one-on-ones, some of them would raise those questions, and they could be addressed there. But thank you, all. Keep safe. Thank you.