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Edited Transcript of BAW.J earnings conference call or presentation 18-Nov-19 10:59am GMT

Full Year 2019 Barloworld Ltd Earnings Call

Sandton Dec 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Barloworld Ltd earnings conference call or presentation Monday, November 18, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Charl Groenewald

Barloworld Limited - CFO of Equipment & CEO of Barloworld Logistic Africa

* Dominic Malentsha Sewela

Barloworld Limited - CEO & Executive Director

* Donald Gert Wilson

Barloworld Limited - Director

* Emmanuel Leeka

Barloworld Limited - CEO of Barloworld Equipment Southern Africa

* Kamogelo Mmutlana

Barloworld Limited - CEO of Automotive & Logistics Business

* Nopasika Vuyelwa Lila

Barloworld Limited - Group Finance Director

* Quinton McGeer

Barloworld Limited - CEO of Equipment Russia

* Zanele Salman

Barloworld Limited - Head of IR

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Conference Call Participants

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* Roy D. Campbell

Morgan Stanley, Research Division - Equity Analyst

* Sameera Mushtaq

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Presentation

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

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Good morning, everyone. Welcome, and thank you very much for joining us this morning for the presentation of Barloworld year-end results. My name is Zanele Salman, and I'm the Head of Investor Relations at Barloworld. We released our results this morning. And during the presentation, we will take you through the highlights of the different division and also from a corporate perspective.

All of our executives will present, led by Dominic Sewela, our Group Chief Executive. We will take questions at the end of all the presentations. Please use the QR codes provided for you to download the presentations as well as all the announcements that we released this morning.

Your safety is very important to us. So please pay attention to the safety video that we will play shortly. Our Group Chief Executive, Dominic Sewela, will start -- will kick off the presentation right after the safety video has been -- is finished.

(presentation)

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

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Good morning, ladies and gentlemen. Welcome to Barloworld's results presentation. Before we get started with the results announcement, I'd like to take this opportunity to acknowledge and thank Mr. Donald Wilson. Most of you know that Mr. Wilson retires in February next year. Don, from me, I'd like to thank you for the loyalty that you've shown to Barloworld, and particularly the fact that you really run this business with impeccable integrity since I've known you. And personally, I will be missing your counsel and nuggets over the period, and I wish you well in the retirement.

But I'd also like to take this opportunity to welcome my new Finance Director, Nopasika Lila. Nopasika, welcome in your new role. I'm looking forward to working with you to ensure that we can continue to deliver results to our various stakeholders. In that, ladies and gentlemen, I'd like to take a different tack this year to start by presenting nonfinancial results because we often give an elaborate detail of nonfinancial results in our annual report, but today I felt it's important that we highlight some of the key areas. As you could see, we've made significant progress in areas like energy consumption as well as our green gas emissions. But however, when you look at fatalities, it has been very disappointing to see that we continue to have fatalities or fatalities that are work related. And one in particular, I like to emphasis sort of underscore is the fatality of one of our employees in Russia because this has been a successive fatality, where our employee was driving to a customer and was involved in a head-on collision that led to fatal injuries. And for me, 1 death is 1 too many. And therefore, we started this financial year to say, when we look at the executive scorecard, we need to put a safety element in the scorecard and give it a waiting. But in the event there's a fatality, notwithstanding any progress made in terms of lost time frequency rate, we will penalize the score to 0.

And the reason why we're doing that is to make sure that we can engender a culture of safety. We know that this is a behavioral element that's required. People need to behave safe at home and at all times, so that even when they come to work, they can be able to return home safely. And that's one area that I'd like to highlight. I mean, the others, I don't want to highlight. I think we've done phenomenally well in terms of the launch of the BEE deal. We've launched as well in there, which is social entrepreneurial fund. Because if you look at countries where we operate, SMMEs are very critical in actually making sure that we can have cohesion in our societies.

Getting to the results, I must say, on the onset, since I've been the CEO, this has been the most difficult trading environment, given the headwinds we faced in South Africa, in particular, as well as the rest of Southern Africa. And I think the geopolitical issues in Russia we've lived with for a while, so we understand that. But I think in Southern Africa, as you can see in the results, that it has impacted in various lines of our results.

But in the main, the revenue was down 5.4%, largely due to the fact that Russia had a historic performance last year at the back of the mining order book, and that was not repeated this year and the revenue there was about 28% down in dollar terms. But we also made a decision to sell 50% of our Avis Fleet business, as well as putting some of our noncore business as Logistics, Middle East as well as SmartMatta. This has had an impact on the revenue line. But what's pleasing is to see that we've actually delivered a very strong free cash flow at ZAR 3.1 billion.

And when you take all the ones off and look at a normalized HEPS, we are up 1.4%. Then Nopasika will sort of delve deeper into that. I'll cover the ROIC element later on. But what is pleasing is to see that the Board has approved a dividend of ZAR 4.62 a share, and at the back of our strong cash and balance sheet have also approved a special dividend of about ZAR 2.28 per share. What I'd like to highlight in this slide is the fact that most of you did participate in the Capital Markets Day in Boksburg where we demonstrated the effects that are being achieved by Barloworld Business Systems, particularly in terms of employee engagement and driving some of the operational efficiencies, then you'll see the working capital of equipment has been impacted by some of the initiatives in this area. The other element that I've spoken about quite a bit in May is the fact that we've concluded the due diligence in our Mongolian targeted acquisition.

So as I said, I want to cover a little bit of the slide because the commitment that we've made in terms of ensuring that we hold a mirror to ourselves in terms of measuring all the effects of what we do is in returns. And the ROIC measures has taken quite a good foothold. But if -- when you look at this number, you can see that it slightly looked like we're moving backward. But when you look granularly, you can see where the biggest challenges are. If you look at our Logistics business, our Angolan operation as well as Botswana, that's where the impact on ROIC and work needs to be done in that area. All the other divisions, such as Motor Trading as well as Equipment South Africa and Russia and Namibia are basically achieving returns above 17%, which for me is pleasing. And I think as we begin to allocate capital, I'm comfortable that we'll begin to see and it'll move in the right direction, particularly in 2020. And in that extent, I think I will end here, and I'd like to invite Nopasika to present the financials.

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

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Good morning, everyone. Thank you, Dominic, and thank you for attending. I'm pleased to present the financial results of Barloworld for 2019. I would like to start off by sharing with you the accounting policies, what has changed, what has remained.

So looking at the accounting policy, they've generally remained the same, with the exception of the adoption of IFRS 9 and IFRS 15. So these new standards have had no material impact on the numbers, with the exception of the additional notes that we had to include in the financial statements. So what I'd like to highlight on this slide is the operational changes resulting from the deconsolidation of Avis Fleet as well as NMI. And the detail of that, we will unpack at a later stage.

One of the highlights this year, is a special dividend that the Board has declared, amounting to ZAR 500 million, and that translates to ZAR 2.28. And it is very good news for all our shareholders. So now our recent dividend trend has remained very strong. And for the current year, we declared ZAR 4.62 and this is in line with the previous financial year. And we're further, and as Dominic has really indicated, rewarded our shareholders with an additional ZAR 2.28. So in this current financial year, the total dividend declared amounts to ZAR 6.90 per share.

We've seen very resilient performance of the operation in tough, tough trading conditions.

And although our revenue is down 5.4% to ZAR 56.8 billion. But important to highlight is Equipment Southern Africa. It is up 3.3% from the previous year, and it contributes 36% of the group's total revenue at 20.4%. -- sorry, ZAR 20.4 billion.

Russia, on the other side is down 20.4% in total revenue. Operating profit levels in absolute terms has decreased, and it's at 13%. However, again, emphasizing the positive results coming from Equipment Southern Africa as well as Motor Trading, up 2.6% and 7%, respectively, in the current year.

I will unpack the corporate costs in the following slide. So other factors impacting the results, including corporate costs, we have, for example, the BEE implementation costs as well as the guaranteed minimum pension adjustment costs from our U.K. business. So on a normalized basis, HEPS from continuing operations, including Avis Fleet is up 1.4% at ZAR 11.67. And last year, it was at ZAR 11.51. So we can all see the impact of the BEE transaction costs as well as the GMP costs on HEPS. On the statement of financial position, I would like to highlight the impact that the reclassification of deconsolidation of Avis fleet and NMI has had on all our assets, specifically, all the categories. For example, if we cast our eyes to the asset classified as held for sale line, you will note that it has increased from ZAR 497 million to ZAR 5.7 billion, resulting from the deconsolidation of Avis Fleet reclassified from the top line there at -- current assets as well as assets and noncurrent assets. That has been reclassified again to the line item assets held for sale.

Also, to note is the increase in our asset -- our net asset value per share and sit from 105 in the previous year to 112 in the current financial year. Looking at the debt maturity of the business. The group debt maturity profile remains very, very strong, with interest-bearing debt reducing from ZAR 11.1 billion to ZAR 8.3 billion. We were also able to repay ZAR 1.7 billion of debt in the current financial year. And it is also pleasing to note and share with you that we have ZAR 10.6 billion of unutilized facilities. Net interest-bearing debt of ZAR 1.1 billion is an improvement from the ZAR 3.2 billion in the prior year. This improvement is attributable to the positive cash generation in the business. The group's investment in working capital generated ZAR 765 million, and this is the result of the reduction in inventories as well as receivables.

However, overall, the operations were significantly improved at ZAR 2.5 billion from ZAR 747 million. I think I said that operation -- but what has changed is the cash flow, apologies for that. So the cash flows from operations were significantly improved from ZAR 2.5 billion to ZAR 747 million. Looking at our key ratios, very good performance, but I'd like to highlight just 2 of the ratios. The cash interest cover improved from 3.2 to 4.7x. And then the net debt-to-EBITDA improved from 0.5 to 0.2x. Looking at our capital structure, our capital structure has remained solid, with debt equity ratio at 4.5%. And this is -- looking at last year, it was at 14. -- sorry, at 14%.

However, we note here that the trading operations remain undergeared. However, we do intend addressing this. And in the last year, we will see that being addressed. It is displeasing for us to report that our return on equity has reduced from 11.4% to 10.1% in the current year. However, with all the targeted actions, we are confident that we are going to -- that number will uplift by 3% to 4% by 2022. And with that, I'd like to hand over to Kamo.

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

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Good morning, ladies and gentlemen. I am pleased to present the automotive results for the period ended 30 September, 2019. And will shortly thereafter be joined by Charl Groenewald, who will take us through the Logistics results. The overall operating environment has been quite challenged economically, as has been evidenced by the various NAAMSA and SAVRALA reported statistics throughout the year. However, our disciplined operational and in-depth management capacity has ensured a very strong showing in terms of our free cash flows that have been generated in the period, returns that are in line with group set targets, as well as obviously the various cost countermeasures that we have implemented and balance sheet optimization measures in the year. The balanced portfolio has continued to deliver and ensured that we could deliver improved used car vehicle margins in an environment that was quite challenged. And in particular, you would see that our fleet under management increase in relation to our leasing business. To the extent in terms of managing our returns we've made some very tough management decisions and ensuring that we could exit the nonperforming operation. And in this case, we exited the Tanzania Avis Fleet business in the period under review. And as reported earlier, Avis Fleet has been held for sale going forward as part and parcel of the group capital release program.

Turnover generated in the period was ZAR 28.4 billion, 66% of which is attributable to our Motor Trading business, with 22% to the rent-a-car business and 12% in our leasing operation.

ZAR 1.7 billion of operating profit was generated with an even distribution contribution by the 3 segments under review. The Automotive business as a whole, given all these headwinds, performed exceptionally well at an operating level. And in particular, headlined by our Motor Trading business as well as the SMD operations in this regard, delivering returns of 13.2%, in line with the group work rate or targeted hurdle of 13.2%. We've seen a reduction in our invested capital base of ZAR 800 million, and operating margin achieved of 6% compared to 5.7% in the prior period. The Car Rental business has been quite challenged and operating in a highly commoditized market that is price-sensitive and exposed to very strong and highly competitive players in this regard.

However, our performance was boosted by used vehicle margins as well as just good operating practices that our management has put in place. You would see that we've achieved utilization of 76% on average across the year, with the fleet having peaked at 29,000, having closed the year 26,000 units, which resulted in a ZAR 400 million reduction in invested capital, improving our returns from last year's 11.5% to 11.7% from a ROIC point of view. Damage costs continue to become a challenge for us. But equally so, they present an opportunity. And to that extent, we're looking to ensure that we can review the fleet damage costs in the period going forward as well as our rental process because it becomes important that we ensure that we can improve our customer experiences in this regard.

Motor Trading while having expressed -- experienced a depressed new car sales market, which was mainly characterized by premium segment that continues to decline, as well as volume brands that are under pressure, still achieved a very pleasing result in the improvement in our operating margins that got to 3% compared to the 2.6% in the prior period and a 7.1% uplift in operating profit, closing the year at ZAR 561 million, reducing our invested capital base by ZAR 400 million and delivering a double-digit return on invested capital of 18.3% compared to 14.3% in the prior year, representing a healthy 4% improvement in the process. The SMD operation as well recorded historic performance by achieving 48,000 units sold in the period under review. We're quite pleased with this particular performance. Our outlook is anchored around the balanced portfolio that we believe will continue to provide resilience for us as we go through the cycle.

We foresee a protected period of low growth in the car rental market with new and used retail segment facing varied degrees of both disruption as well as disintermediation by manufacturers. When you look towards BMW South Africa that has expressed a view to change their dealer model to an agency model, similar to what we've experienced in the Mercedes-Benz passenger segment as well as, obviously, changing consumer trends that where consumers want more options with things like ride hailing, subscription services. And importantly, we are -- have taken steps to start to change and adapt our business towards a much more digitally-focused business model. We still see the fleet leasing market that continues to equally face challenging economic and competitor landscape changes with new players that are entering the market and consolidation in some sectors as headlined by some of the banks that we've seen, making acquisitions in this space in the recent past.

The weak bureaucratic public sector system continues to contribute towards market stagnation in this particular market. We would further look to bed down the newly acquired BMW Centurion effective 1 October of 2019 in cementing and strengthening our geographic position in the Pretoria market. To that extent, we continue to invest quite aggressively in the rollout of Barloworld Business Systems as we look to a self-help approach through this coming period, as we look towards capturing operational efficiencies as well as driving returns, free positive cash flows and ensuring that we can improve our employee experiences as well as our customer experiences in this regard. Thank you, ladies and gentlemen. I'll hand over to Mr. Charl Groenewald.

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

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Good morning, everybody. From an operating performance point of view, Logistics recorded a very disappointing result in 2019, and this was impacted by the items I've highlighted on the board behind me. What is important to note is that we're making some great strides in disposal of 2 of our identified noncore businesses. We are busy negotiating due diligence processes with a number of interested parties. And I'm pleased to report that we've also signed the sales agreement for our Middle East business over the weekend.

From a 2019 revenue perspective, our decision to exit in a certain amount of contracts in the nonprofitable space impacted our revenue as well as the loss of one of our long-standing transport management contract. The exit of these contracts can be seen on our reduction in our owned vehicle kilometers traveled in the year of 7.5% reduction. It also included us exiting a cross-border business in late 2018. However, despite these challenges, we still managed to deliver a 9.5% ROIC for the year in our continuing operations. If I look forward to 2020, the year is underpinned by a high customer retention rate in both of our 2 businesses in 2019, and this is further supported by go-live of a significant transport management contract in the chemical industry in mid-August.

We're now going into a different phase of our strategy. We're going into the optimized phase. And it remains critical that we achieve management continuity, specifically from our customer point of view and as well as to transform the culture of our team. And that's one of my personal objectives for 2020 to deliver that. From a growth agenda, you remember that we'll be maintaining or focusing on organic growth in our existing verticals, and we have strengthened our capabilities and our capacity to work the solid pipeline of opportunities in both our supply chain and selective transport industries. However, to deliver on our 2020 results is critical that we conclude the disposal of the 2 noncore businesses in 2020. And coupled with our joining with Automotive, to leverage the opportunities stemming from that opportunity. And based with that, I'm confident that we are on track to meet the 11% to 13% ROIC challenge that's been set for our third year of our strategy -- our turnaround strategy.

And talking about strategy, we haven't changed it. We're still consistent with what we -- was implemented 3 years ago, and the management team and myself are committed to execute on the strategy that was started by Kamogelo a couple of years ago.

The other 2 areas of our strategy focuses on internal performance opportunities, which we'll be pursuing in 2020 in our Equipment and Automotive businesses, as well as the scaling of some digital solutions that we successfully had proof of concepts tested in our Equipment business. I thank you, and I hand over to Quinton.

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

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Good morning, everyone. I'm pleased to present the results for the Russian division September 2019. Revenue were down 28.6% to $432.5 million, and that was on the back of a big mining deal -- 2 mining deals to Polyus and NordGold that were delivered in 2018 and not repeated in 2019.

The impact of the increased in import duties on the business performance were less severe than originally anticipated. We've managed to maintain the same ratio between U.S. and non-U. S. product sold in 2019 compared to 2016. Operating profit were down 18.7% to $50 million. But from a margin perspective, we managed to improve from a 10.3% to an 11.6% in 2019. And this was positively impacted by the sales mix as well as the continued cost control. We generated a ROIC of 17.7%, well ahead of the group target rates. And also very pleasing to see that from a cash perspective, another strong year, generating $36.6 million. I would like to stress that this, in absolute terms, is the second best result that the division has generated since incorporation.

When we look at the aftermarket -- sorry, at the equipment prime product revenue, this is dominated by the mining segment with 76% of the sales coming from this industry. From an infrastructure perspective, also strong contribution, 16% to our construction customers as well as energy and transportation coming -- leading the flank with 7% contribution. In terms of total revenue, aftermarket contributed 51% of the overall revenue. And this contributes -- this has enhanced the profitability, operating margin in the division. This slide also illustrates the importance of aftermarket. In the division's ability to absorb external shocks, as indicated on the slide, when the sanctions was implemented in 2014 with the division still able to generate quite good operating quality operating margins.

The continued growth in the active machine population will further strengthen the resilience of this division. From a commodity perspective, we're very fortunate to support a diversified mining industry with blue-chip miners as well as junior miners in our key account portfolio. Gold, comparing 2013 revenue lines to 2019 revenue lines dominated with 35% of the revenue coming from the gold segment. From a coal perspective, we did generate quite a substantial improvement, with 31% of the revenue coming to the segment. And this was largely driven by deliveries into the underground segment in Russia. Also pleasing to note that we are still supporting the mining industry, which is controlled by Alrosa, a government -- a partly owned governmental organization.

Historically, there has not been a very good correlation between your firm order book that you start the financial year with and the sales generated during the financial year. If you look at the 2012, 2013 financial years, and you compare that as an example to the 2018 financial year. In 2012, we started roughly with the $60 million, and we still generated $350 million. Compare that to 2018, as an example, where we started with a $200 million firm order book and also generated $350 million.

I think what's very important to note is that it's more than a firm order book that determines the success for a financial year. It is linked to your working capital or your stock on the ground, your ability to close the deals, Caterpillar lead times and finding the right mix between all of those actions.

Looking at the progress with some of our key accounts, we've talked about Alrosa and we continue to see -- to support Alrosa. But I think Polyus continues -- we continue to support and be a very important partner for Polyus. On the back of the $100 million delivery in 2018, we've delivered $16.7 million during the 2019 financial year and secured a further $35 million to be delivered in 2020.

Norilsk Nickel another big key blue-chip miner, where we have managed to secure $24.5 million to be delivered in the 2020 financial year with significant upside as well as they are also busy with greenfield feasibility study that will come online within the next 5 years. I think the most pleasing and exciting opportunity on the map, East KAZ Minerals, where they are very close in terms of finalizing the feasibility study, a copper deposit in the Russian far East. And we expect this mine to come online within the next 3 to 4 years as well with potential of over $300 million worth of opportunities.

So in closing, Russia is a key market for the group, and we expect a stable mining sector and commodity outlook. We do not expect or anticipate any changes from their duties. And it is pleasing to note that we are starting the 2020 financial year with a very strong firm order book. As at the end of September, we've secured the $113 million, that is the second best firm order book in the history of the division as well. Subsequent to the financial year-end, we have secured a further $25 million.

Aftermarket revenue, we're expecting to improve on the back of the increased machine population, as well as our strategy to focus on component rebuilds and improved salvage capabilities. We will also be launching the Barloworld Business System during the latter half of 2020, focusing on operational excellence.

And with that, I think, from our perspective, we will continue to focus on balance sheet efficiencies to support the returns and generate free cash.

Thank you. And with that, I would like to 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. I'm pleased to present Barloworld Equipment results for year ending September 2019. Revenue was up at 3.3% despite difficult trading environment, and it was mostly driven by the aftermarket growth. The gains in the mining equipment sales were offset by the reduction in the construction equipment sales. The rest of Africa revenue contribution came down to 32%. Our operating profit was up at ZAR 2.6 billion to ZAR 1.8 billion, with the operating margin in line with prior year. Despite our continued investment in operational transformation project, as we have already started over a year with our Barloworld Business Systems implementation. Our associate income was up to ZAR 249 million, strongly driven by our -- the performance in the Democratic Republic of Congo, but offset by the losses in our Barzem JV.

The division delivered ZAR 2 billion of cash in the reporting period. Our focus on the aftermarket delivered growth of 7.7% in the sector. And also that uplifted the contribution of the aftermarket to 54%. The top graph indicates the evolution of our operating profit margin over the period hovering from 8.5% to 9.8%. However, I would like to indicate the impact of the foreign exchange on our operating profit margin, and we've introduced the EBIT margin line, which takes into effect the hedge accounting, where the EBIT margin was hovering between 7.5% to the maximum of about 8.6% over the period, which normalized the impact. It's important, though, to note as well that we maintain a similar level of the operating margin in 2019 despite the fact that there was an improvement in the mix. Bearing in mind, in 2018, we had to release the provision for our stock, which positively impacted our operating margin in 2019.

Our continued resilient effort in focusing on cost reduction as well as the rollout of BBS have actually assisted us in making sure that we can sustain our operating margin at those levels. Despite the challenges in the region, it is pleasing to know that South Africa as well as Namibia, were able to maintain the returns above the hurdle rate. And we can see good progress in Mozambique and Zambia, but also we have clear focus in terms of what we need to do in terms of Botswana and Angola, we have gone through a process of rationalization in the region, and we will see going forward as the dynamics in the regions are changing, seeing a positive trend in those regions.

The unfortunate part in terms of the increase in the average invested capital, which impacted our -- slightly impacted our ROIC. Our invested capital -- actual invested capital has reduced by ZAR 700 million, that was also offset by our investment in Bartrac, which increased over the period.

I've included in the -- those who have the slides, a detailed explanation and given the context of the operations and regulatory framework for the 11 countries that we are operating in.

Let's turn now to equip -- new equipment sales by segment. As you can see, mining has a contribution moved from 43% to 50%, driven strongly by increase in new machine sales of 20% and offset by the decrease in construction machines. Mining is still key driver for our business. And as you can see, the machine sales -- 70% contribution of machine sales went into the mining sector. We have seen a shift as well in terms of the owner mining to contract mining, whereby the total of all machines that were sold to the mining sector, 50% of those were for contract miners. As indicated by Quinton, this improvement in terms of the machine sales was driven basically by the reduction in lead times, machine availability and also the launching of Cat Finance, which supported emerging contractors in our territory.

The region is well endowed with different commodities, which help the business to defend against cyclicality. As you can see, we are still, though, exposed to coking coal in Moatize, thermal coal in South Africa. But it's pleasing to see the increase in terms of the diamonds, particularly around Catoca as well as the machines that we delivered for Orapa mine in Botswana. But also followed by the increase in flagship mine of Anglo, we have a strong back order to deliver as well in terms of the platinum sector. Bartrac continues to deliver strong results despite the challenging regulatory framework, but also fluctuating cobalt prices that we've seen during the period, with the associate income moving from ZAR 251 million to ZAR 268 million. We are looking at diversifying concentration in terms of our customers, also with the opportunities that -- at hand with regards to the Chinese customers in the territory.

The outlook for mining in the territory still look very strong. The pipeline is strong. The greenfields project in the territory, as you can see, despite the regulatory framework, we were able to continue to deliver machines to Mota as well as Vale in the prior year. We have a very strong order book for Vale as well as Tharisa and also some of the machines for Anglo that we'll be delivering in the following year. Mining in South Africa is expected to remain stable, supported by a favorable commodity price line. As was indicated, the headwinds in the Democratic Republic of Congo, we foresee a slight decrease in the associate line. There's opportunity for us to grow the market share in both the machines and the aftermarket through competitive product range and aftermarket solutions. But I'd also like to say given the fact that a Caterpillar has also embarked on a journey in terms of their 2026 strategy of the services to double the services we aligned with Caterpillar in doubling our services growth by 2026. We have managed to retain our level 1 B-BBEE, and we are pleased to say that will give us more opportunities in terms of the recently announced government RT57 opportunities.

We will continue to focus on Mozambique and the Rovuma opportunities, leveraging local genset packaging to grow our market share. Order book remained strong, and the team will continue to focus on cost reduction as well as on invested capital reduction. And as we've been going through rolling out Barloworld Business System that will help us in terms of improving our returns. With that, I would like to thank you, and I'd like to hand over back to our Group CE.

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

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I think this -- bringing it all together in terms of where we are with the strategic implementation are fixed -- on the fixed side. I think on the fixed side, the one area that still needs to be completed is Logistics. As we've highlighted, with respect to the ones-off this year, I'm fairly comfortable, Charl, that I think with your team, by rolling out the existing strategy and focusing more on the net operating profit after tax, you'll be able to basically hit the targets that we've set between 9% to 11% -- I mean, 11% to 13% in the new financial year. I think what is also something that we'd like to focus on is really the turnaround plan with respect to Angola, in particular, as well as Botswana. Because I think this is where our returns are depressed because I think we operate in emerging market, we cannot avoid the challenges and headwinds in those areas. I think what we could do as management is to do our best in making sure that we can deliver the desired results in that area.

I think on the optimize side, we had identified several activities. What was disappointing for me was the Avis Fleet disposal, where we head down the road with a funder, who had agreed certain terms. But when it came to the BEE element, there were certain setbacks in terms of them wanting to just to take that equity position. And my position is that, have I wanted an equity partner, it is certainly not -- won't be the bank. Because I think money is a commodity. I would've wanted an equity partner who'd add value to ensure that we continue not only to retain the existing contracts with government departments and various other corporates. So therefore, BEE is an imperative for us, and we are looking at other ways that we are able to close the transaction within the time frame that we have set for ourselves.

I'm pleased also with the work that Donald and the U.K. team have done to ensure that we can be able to repatriate some capital from the U.K. Because what you can see, our balance sheet is very lazy. When you have a ZAR 20 billion in equity and generating a 10% equity, that for me, require that we release capital, introduce debt as we fund our Mongolian operation. And as Nopasika has highlighted, those actions, together with some acquisitions will enable us to ensure that we can be able to exceed our return on equity targets by 2022.

I think Mongolia -- I think Quinton and Chris, you guys have traveled to Mongolia several times. It's certainly a vast area geographically and very challenging when you look at having to do a detailed due diligence. I think the time line that we have set for ourselves was pretty tight. And -- but I'm pleased that when I look at the reports, as well as the work that we've done in understanding that business that we are more comfortable now that we will be able to conclude all the outstanding issues with the seller in that business, and we should be looking -- announcement as soon as we are able to do so. I had wished that I could be able to make that the financial effect, in particular, this time around, but I'm not in a position to do so.

I think for me, I'm comfortable at the exits that we've taken and have now laid a foundation that as we move forward, the existing operations are able to focus on key areas, particularly as it relates to efficiencies and organic growth. So to a certain extent, we will need to be lucky by certain government actions, particularly in South Africa.

I think we've seen the government making the right noises in terms of what needs to be done. But I think for us, what is important is to see an execution, particularly when you look at infrastructure. We've seen construction company close left, right and center. And that's not sustainable when you look at the current situation of our infrastructure in South Africa. I think when you look at the rest of Africa, there are clear challenges in those countries where you have single commodities like Botswana that relies on diamonds.

I think with synthetic diamonds is going to put further pressure in terms of diamond prices in that country. So for me, I'm saying it's therefore imperative that in allocating capital we begin to focus on acquisitions. And the current market, even in South Africa, does present an opportunity when you look at pricing and valuation of some of the assets. And I think in due course, we will be able to announce various initiatives in that regard. I think when you look at our balance sheet, we're very strong be it our capacity from a debt point of view and our ability to generate sustainable cash flow going forward. I don't like to repeat some of the issues that various CEs have highlighted. But I don't see that we're going to have an easy 2020. But I think the team is resilient and ready, when I measure leadership involvement as well as employee engagement as demonstrated by the rollout of BBS and Equipment, I'm encouraged to see that we'll be able to face the challenges in the 2020. I think I can take questions, if there are any.

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Questions and Answers

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Sameera Mushtaq, [1]

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It's Sameera from Nedbank Securities. So I just had 2 questions. On the Avis Fleet transaction, can you give us a sense of whether it's going to be dilutionary if -- in any way? And then just on the road construction side, are you seeing any tenders coming through or starting to get rolled out?

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

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Okay. I'll -- while I answer the Avis Fleet business, I'm going to get Emmy to prepare to answer the second question. I think initially when you look at the Avis Fleet because we're selling 50%. From an earnings, initially, it will be diluted because you're now going to be reporting 50% of your earnings below the lines. But fundamentally, our view is that if you do not do this BEE transaction, you actually would just erode as we begin to lose contracts, whether with provincial governments or national governments. So initially, it will be. But when you look at the accretive nature of the transaction really is releasing debt capacity and also allowing us to get some equity that we can deploy elsewhere to ensure that we can apply it in the right areas. If you remember that our rationale of doing that business, one, was the issue of BEE. Secondly, was the fact that the way you fund that business, it is not accretive in making us get to our objectives of increasing intrinsic value. Okay. Emmy?

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Emmanuel Leeka, Barloworld Limited - CEO of Barloworld Equipment Southern Africa [3]

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Yes. Just on the infrastructure side, as I've mentioned, the RT57 with the government, we were able to now, just in a matter of a month also being able to get orders of more than 100 units for the government, which is quite pleasing. But also if you look at the roads asset class, we're seeing some of the tenders coming through, particularly on the N2 and in N4, which is quite sort of positive for us going forward.

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

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Where's the next question? Roy?

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Roy D. Campbell, Morgan Stanley, Research Division - Equity Analyst [5]

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Dom, just a question about the special dividend. It wasn't the full amount that you transferred from the pension restructuring. What's the plan for the balance of the amount?

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

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Yes. I think -- don't look at the amount in that way, Roy. For me, I mean, it's a technical issue paying out a dividend. Because I don't think it's a huge accretive element. But I said in May, that we sold Spain about a year ago, and we've held ZAR 2.5 billion of that capital in an environment where we're not able to generate returns on it, because it's a low interest environment. So our view was to apply that capital in our Mongolia transaction. It has taken longer than I anticipated. Therefore, for me, I think it's only fair that we recompense shareholders that have been waiting to see us allocated capital effectively. So that is in that regard. It's got no relation because the release of the capital from U.K. just came in the new financial year, it just give us more capital base for us to be able to fund growth, yes.

Any other question? Okay, he has a question right here. Yes.

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Unidentified Analyst, [7]

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Dom, could you please just give us some ongoing guidance for the corporate overhead?

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

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Yes. A very good question. I think when you look at corporate overheads, you need to think about the BEE transaction. And I'm going to give Nopasika, just sort of give you a sense that over the next 2 years, there will still be more cost coming through that area. And what you will also see, I think, when you look at investments in skills because of our centralized model where we basically are taking people out of divisions and bringing them into the center to drive particularly strategy and M&A and also making sure that we are beginning to standardize in terms of the way we look at talent. That has been an increase at the corporate level, but a decrease at an operational level. But that you probably will stabilize at the level that you've seen here. But I think in terms of the BEE and some of the costs relating to acquisitions will still come through. But Nopasika, do you want to highlight some of the issues there?

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Nopasika Vuyelwa Lila, Barloworld Limited - Group Finance Director [9]

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Thank you, Dominic. Yes, maybe just to indicate how much the implementation costs for the current year. Currently, it's implementing -- BEE cost is at ZAR 73 million, that's how much you spent. And for 2020, I think the total cost -- Rebecca, you'll help me there. I think it's ZAR 172 million in 2020. So that's what you will expect to see coming through in 2020.

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Dominic Malentsha Sewela, Barloworld Limited - CEO & Executive Director [10]

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Okay. (inaudible)

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Unidentified Analyst, [11]

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Congratulations for a good work. Just -- you're very fortunate to have dry powder in this market where you can get assets cheaply. In terms of acquisition, can you just give us a bit of sense as to what are the white spaces that you're looking at? What are the gaps in your product line? And also geographically, what are you looking at in terms of acquisition. So if you can just give us a bit of -- so that you don't get surprised once you announce an acquisition. And also size-wise, what kind of sizes, number in terms of acquisitions?

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Dominic Malentsha Sewela, Barloworld Limited - CEO & Executive Director [12]

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Yes. (inaudible) I don't like answering that questions because -- now I'm going to be telling everybody that I'm coming after your asset and then people are going to see me coming and I don't like that. But notwithstanding though, we take into account, first and foremost, our core existing capabilities. So that's the first area where we'll look and drastically as demonstrated by Mongolia because it's the Cat dealership, so we'll be able to look at it. I think when you look at motor dealerships, I don't think there's anything of substance that you'll find. I mean, we'll make an acquisition of 1 BMW here or if I got more Toyotas, I definitely love Toyotas, I'd probably look at it, but it's not going to be meaningful in that area. So one will have to look at adjacencies in existing businesses. But having said so, we've identified guardrails that will see outside of what is core and adjacencies that areas that we like to venture into. And those areas we've described in terms of the aspect of size, in terms of profit pools and in terms of the structural nature that those businesses should be cash generative. Where as you look at our current portfolio of business are very working capital hungry.

In our view, when you talk about asset-light, you know whilst it's easier said, the challenge that you get is the type of multiples that you'll be paying in those businesses. And I think the reason why we needed to make sure that we develop a culture and an approach in managing our assets akin to what we call Barloworld Business System is our believe that when we acquire some of these businesses, this is where we'll be able to extract daily utilizing BBS.

But there could be some elements where I surprise you. I might have to give you an equity story that I have to justify, but I'm not going to go out there and say, these are the target areas because some of it I'm currently reviewing. Thank you. Okay. On that note -- yes, Zanele?

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Zanele Salman, Barloworld Limited - Head of IR [13]

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We've got a few from the webcast. Okay. First question is from James Twyman, Prescient Securities. Could you outline the total cash impact of the U.K. pension issue on the results and for the next few years? How did the Motor business managed to improve profits in such a tough environment? Also, could you give an estimated timing for the Avis sale?

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Dominic Malentsha Sewela, Barloworld Limited - CEO & Executive Director [14]

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Okay. I'm going to start with the latter part because of it can't find few people will -- I can see Kamo is chest out, wanting to talk about his achievement in Motor Trading. And because I think it's very phenomenal. And Don, could you maybe comment on the pension fund? But I think when you look at the time line, the time line that I had set for the Avis Fleet was that we should be closing that deal, at least, the funding structure as it relates to equity for the BEE by now. And with the fact that we're not able to achieve that, I've now set a new time line to set, we need to close the transaction by September, the latest. I'm not too worried in terms of the equity portion, because it was very small. But in terms of the headroom, that business was going to be able to give us anything between ZAR 2.8 billion and ZAR 3.4 billion. So the new time line for me is that we need to be able to close the transaction by end of September. Don, do you want to go first on the pension fund?

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Donald Gert Wilson, Barloworld Limited - Director [15]

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Okay. I think the first piece of the question really is what's happened in the pension fund during the current year. So we had a liability last year of about GBP 95 million, so deficit was GBP 95 million. During the year, the discount rates come down from 2.9% to 1.9% and that's added close to GBP 90 million to the liability. But at the same time, we have had very good returns on the assets. So -- and that's come in at about GBP 44 million, so it's reduced their deficit. And at the same time, some of the actuarial assumptions like life expectancy of males in the U.K. has dropped slightly. So there's about GBP 11 million benefit in that regard. And so I mean, in the year, so we've gone from GBP 95 million, up to GBP 113 million. At the same time, the pension recovery plan that is in place -- we put in place from April '17, which runs for about 9 years, but it gets reviewed every 3 years. So we've paid in the current year about GBP 13 million, which is the annual installment. We also had short paid them by about GBP 2.6 million last year. And -- okay, so we then -- okay -- and so each year, we'll be paying across GBP 13 million, and the GBP 13 million and that gets reviewed again in April 2020. So it happens every 3 years. So we have another recovery plan on our way for Quinton to -- and Nopasika to work on.

What we have agreed in terms of this restructure in the U.K. is that we would effectively -- we've effectively reduced the equity of the holding company by GBP 50 million. We've agreed that we will take GBP 40 million out of that back to South Africa. And at the same time, we declared a dividend of 30 -- we will declare a dividend of GBP 30 million. So effectively, we're bringing GBP 70 million back to South Africa. But in terms of the agreement with the fund is that there's a match, where is the dividend we match those dividends worth exceeds GBP 13 million. So effectively, we'll be paying the fund that -- we'll be receiving GBP 30 million -- GBP 70 million, and we'll be paying the fund that an additional GBP 30 million over and above the GBP 13 million that we pay annually. So we paid GBP 6 million of that last year. And we'll pay GBP 24 million in 2020. So we paid -- and that's really just to get -- make it more tax effective for the group. So effectively, we're going to get GBP 70 million back in the 2020 financial year. And the pension fund is going to get an extra GBP 24 million on top of the GBP 6 million we got last year, and they will get their GBP 13 million contribution. I don't know if that answers the question.

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Dominic Malentsha Sewela, Barloworld Limited - CEO & Executive Director [16]

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I think it does. Zanele, next question?

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Zanele Salman, Barloworld Limited - Head of IR [17]

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Okay. Next question is from Ed Pienaar at Tantalum Capital. Avis Fleets, does the BEE deal we've just done at group level not enough to show that Barloworld is serious about empowerment, especially versus other listed competitors. Am I right in inferring that the planned structure has now failed? What is the new time line to certainty? Who are the new financiers? And then the second one is, is there a long stop date on Wagner we need to be aware of?

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

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There's no long stop date on Wagner. I think, suffice to say, we are at the final stages of the transaction with Wagner. I think when you look at the BEE transaction, there's various elements of companies. You've had Emmy talked about once again being Level 1 BEE. Whereas when you start looking at other companies, notwithstanding the BEE transaction that we've done. Some of them, like the group, for instance, at about 3 vehicles. The goals have been changed in some of the areas. But my view is that when you like -- when you want to be more competitive in certain segments, particularly corporates, we are required to be even more compliant to the tune where people look at the operating asset like Avis Fleet vis-à-vis at the group level. So I don't think the structure has failed. I think unfortunately, if you live in certain countries like South Africa, there is a cost of doing business whether we like it or not, I don't set those standards. I have to make sure that I do better than my competitors and I continuously do so to me it difficult for them to catch on with me. And as long as we also makes transaction that are sensible, that we're not diluting shareholders adversely, because this transaction I could have done without doing a BEE deal just to actually make sure that I can deconsolidated and be able to get the equity and make sure that, that asset is deconsolidated. But for me, that is not the main drive. The main drive, I'm saying, I'd rather ensure that we do industrialization. Because I think in South Africa, as a corporate citizen, we've got a responsibility that if we look at cohesion, we, as companies, if we don't get involved in that, our ability to operate in these environments become very difficult.

So for me, I think, it's important that we take that into account. And so because the stakeholders are broader than the shareholders in this particular instance. And we want to make sure that all the key stakeholders, we are able to deliver accretive value to everybody.

Was it the last one? Unfortunately, ladies and gentlemen, I do not have a zen garden to take you to. But however, given our compliance, we can -- you can join us to enjoy the lunch with us as it's laid out there, and then there will be various executives and some of them nonexecutive directors that have retired, but are here, that could help us in answering some of the questions. Thank you very much, ladies and gentlemen.